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Gerald Friedman, University of Massachusetts at Amherst

Unions and Collective Action

In capitalist labor markets, which developed in the nineteenth-century in the United States and Western Europe, workers exchange their time and effort for wages. But even while laboring under the supervision of others, wage earners have never been slaves, because they have recourse from abuse. They can quit to seek better employment. Or they are free to join with others to take collective action, forming political movements or labor unions. By the end of the nineteenth century, labor unions and labor-oriented political parties had become major forces influencing wages and working conditions. This article explores the nature and development of labor unions in the United States. It reviews the growth and recent decline of the American labor movement and makes comparisons with the experience of foreign labor unions to clarify particular aspects of the history of labor unions in the United States.

Unions and the Free-Rider Problem

Quitting, exit, is straightforward, a simple act for individuals unhappy with their employment. By contrast, collective action, such as forming a labor union, is always difficult because it requires that individuals commit themselves to produce “public goods” enjoyed by all, including those who “free ride” rather than contribute to the group effort. If the union succeeds, free riders receive the same benefits as do activists; but if it fails, the activists suffer while those who remained outside lose nothing. Because individualist logic leads workers to “free ride,” unions cannot grow by appealing to individual self-interest (Hirschman, 1970; 1982; Olson, 1966; Gamson, 1975).

Union Growth Comes in Spurts

Free riding is a problem for all collective movements, including Rotary Clubs, the Red Cross, and the Audubon Society. But unionization is especially difficult because unions must attract members against the opposition of often-hostile employers. Workers who support unions sacrifice money and risk their jobs, even their lives. Success comes only when large numbers simultaneously follow a different rationality. Unions must persuade whole groups to abandon individualism to throw themselves into the collective project. Rarely have unions grown incrementally, gradually adding members. Instead, workers have joined unions en masse in periods of great excitement, attracted by what the French sociologist Emile Durkheim labeled “collective effervescence” or the joy of participating in a common project without regard for individual interest. Growth has come in spurts, short periods of social upheaval punctuated by major demonstrations and strikes when large numbers see their fellow workers publicly demonstrating a shared commitment to the collective project. Union growth, therefore, is concentrated in short periods of dramatic social upheaval; in the thirteen countries listed in Tables 1 and 2, 67 percent of growth comes in only five years, and over 90 percent in only ten years. As Table 3 shows, in these thirteen countries, unions grew by over 10 percent a year in years with the greatest strike activity but by less than 1 percent a year in the years with the fewest strikers (Friedman, 1999; Shorter and Tilly, 1974; Zolberg, 1972).

Note: This table shows the unionization rate, the share of nonagricultural workers belonging to unions, in different countries in different years, 1880-1985. Because union membership often includes unemployed and retired union members it may exceed the number of employed workers, giving a unionization rate of greater than 100 percent.

Table 2
Union Growth in Peak and Other Years

Country

Years

Membership Growth

Share of Growth (%)

Excess Growth (%)

Top 5 Years

Top 10 Years

All Years

5 Years

10 Years

5 Years

10 Years

Australia

83

720 000

1 230 000

3 125 000

23.0

39.4

17.0

27.3

Austria

52

5 411 000

6 545 000

3 074 000

176.0

212.9

166.8

194.4

Canada

108

855 000

1 532 000

4 028 000

21.2

38.0

16.6

28.8

Denmark

85

521 000

795 000

1 883 000

27.7

42.2

21.8

30.5

France

92

6 605 000

7 557 000

2 872 000

230.0

263.1

224.5

252.3

Germany

82

10 849 000

13 543 000

9 120 000

119.0

148.5

112.9

136.3

Italy

38

3 028 000

4 671 000

3 713 000

81.6

125.8

68.4

99.5

Japan

43

4 757 000

6 692 000

8 983 000

53.0

74.5

41.3

51.2

Netherlands

71

671 000

1 009 000

1 158 000

57.9

87.1

50.9

73.0

Norway

85

304 000

525 000

1 177 000

25.8

44.6

19.9

32.8

Sweden

99

633 000

1 036 000

3 859 000

16.4

26.8

11.4

16.7

UK

96

4 929 000

8 011 000

8 662 000

56.9

92.5

51.7

82.1

US

109

10 247 000

14 796 000

22 293 000

46.0

66.4

41.4

57.2

Total

1043

49 530 000

67 942 000

73 947 000

67.0

91.9

60.7

79.4

Note: This table shows that most union growth comes in a few years. Union membership growth (net of membership losses) has been calculated for each country for each year. Years were then sorted for each country according to membership growth. This table reports growth for each country for the five and the ten years with the fastest growth and compares this with total growth over all years for which data are available. Excess growth has been calculated as the difference between the share of growth in the top five or ten years and the share that would have come in these periods if growth had been distributed evenly across all years.

Note that years of rapid growth are not necessarily contiguous. There can be more growth in years of rapid growth than over the entire period. This is because some is temporary when years of rapid growth are followed by years of decline.

Sources: Bain and Price (1980): 39, Visser (1989)

Table 3
Impact of Strike Activity on Union Growth
Average Union Membership Growth in Years Sorted by Proportion of Workers Striking

Country

Striker Rate Quartile

Change

Lowest

Third

Second

Highest

Australia

5.1

2.5

4.5

2.7

-2.4

Austria

0.5

-1.9

0.4

2.4

1.9

Canada

1.3

1.9

2.3

15.8

14.5

Denmark

0.3

1.1

3.0

11.3

11.0

France

0.0

2.1

5.6

17.0

17.0

Germany

-0.2

0.4

1.3

20.3

20.5

Italy

-2.2

-0.3

2.3

5.8

8.0

Japan

-0.2

5.1

3.0

4.3

4.5

Netherlands

-0.9

1.2

3.5

6.3

7.2

Norway

1.9

4.3

8.6

10.3

8.4

Sweden

2.5

3.2

5.9

16.9

14.4

UK

1.7

1.7

1.9

3.4

1.7

US

-0.5

0.6

2.1

19.9

20.4

Total: Average

0.72

1.68

3.42

10.49

9.78

Note: This table shows that except in Australia unions grew fastest in years with large number of strikers. The proportion of workers striking was calculated for each country for each year as the number of strikers divided by the nonagricultural labor force. Years were then sorted into quartiles, each including one-fourth of the years, according to this striker rate statistic. The average annual union membership growth rate was then calculated for each quartile as the mean of the growth rate in each year in the quartile.

Rapid Union Growth Provokes a Hostile Reaction

These periods of rapid union growth end because social upheaval provokes a hostile reaction. Union growth leads employers to organize, to discover their own collective interests. Emulating their workers, they join together to discharge union activists, to support each other in strikes, and to demand government action against unions. This rising opposition ends periods of rapid union growth, beginning a new phase of decline followed by longer periods of stagnant membership. The weakest unions formed during the union surge succumb to the post-boom reaction; but if enough unions survive they leave a movement larger and broader than before.

Early Labor Unions, Democrats and Socialists

Guilds

Before modern labor unions, guilds united artisans and their employees. Craftsmen did the work of early industry, “masters” working beside “journeymen” and apprentices in small workplaces. Throughout the cities and towns of medieval Europe, guilds regulated production by setting minimum prices and quality, and capping wages, employment, and output. Controlled by independent craftsmen, “masters” who employed journeymen and trained apprentices, guilds regulated industry to protect the comfort and status of the masters. Apprentices and journeymen benefited from guild restrictions only when they advanced to master status.

Guild power was gradually undermined in the early-modern period. Employing workers outside the guild system, including rural workers and semiskilled workers in large urban workplaces, merchants transformed medieval industry. By the early 1800s, few could anticipate moving up to becoming a master artisan or owning their own establishment. Instead, facing the prospect of a lifetime of wage labor punctuated by periods of unemployment, some wage earners began to seek a collective regulation of their individual employment (Thompson, 1966; Scott, 1974; Dawley, 1976; Sewell, 1980; Wilentz, 1984; Blewett, 1988).

The labor movement within the broader movement for democracy

This new wage-labor regime led to the modern labor movement. Organizing propertyless workers who were laboring for capitalists, organized labor formed one wing of a broader democratic movement struggling for equality and for the rights of commoners (Friedman, 1998). Within the broader democratic movement for legal and political equality, labor fought the rise of a new aristocracy that controlled the machinery of modern industry just as the old aristocracy had monopolized land. Seen in this light, the fundamental idea of the labor movement, that employees should have a voice in the management of industry, is comparable to the demand that citizens should have a voice in the management of public affairs. Democratic values do not, by any means, guarantee that unions will be fair and evenhanded to all workers. In the United States, by reserving good jobs for their members, unions of white men sometimes contributed to the exploitation of women and nonwhites. Democracy only means that exploitation will be carried out at the behest of a political majority rather than at the say of an individual capitalist (Roediger, 1991; Arnesen, 2001; Foner, 1974; 1979; Milkman, 1985).

Craft unions’ strategy

Workers formed unions to voice their interests against their employers, and also against other workers. Rejecting broad alliances along class lines, alliances uniting workers on the basis of their lack of property and their common relationship with capitalists, craft unions followed a narrow strategy, uniting workers with the same skill against both the capitalists and against workers in different trades. By using their monopoly of knowledge of the work process to restrict access to the trade, craft unions could have a strong bargaining position that was enhanced by alliances with other craftsmen to finance long strikes. A narrow craft strategy was followed by the first successful unions throughout Europe and America, especially in small urban shops using technologies that still depended on traditional specialized skills, including printers, furniture makers, carpenters, gold beaters and jewelry makers, iron molders, engineers, machinists, and plumbers. Craft unions’ characteristic action was the small, local strike, the concerted withdrawal of labor by a few workers critical to production. Typically, craft unions would present a set of demands to local employers on a “take-it-or-leave-it” basis; either the employer accepted their demands or fought a contest of strength to determine whether the employers could do without the skilled workers for longer than the workers could manage without their jobs.

The craft strategy offered little to the great masses of workers. Because it depends on restricting access to trades it could not be applied by common laborers, who were untrained, nor by semi-skilled employees in modern mass-production establishments whose employers trained them on-the-job. Shunned by craft unions, most women and African-Americans in the United States were crowded into nonunion occupations. Some sought employment as strikebreakers in occupations otherwise monopolized by craft unions controlled by white, native-born males (Washington, 1913; Whatley, 1993).

Unions among unskilled workers

To form unions, the unskilled needed a strategy of the weak that would utilize their numbers rather than specialized knowledge and accumulated savings. Inclusive unions have succeeded but only when they attract allies among politicians, state officials, and the affluent public. Sponsoring unions and protecting them from employer repression, allies can allow organization among workers without specialized skills. When successful, inclusive unions can grow quickly in mass mobilization of common laborers. This happened, for example, in Germany at the beginning of the Weimar Republic, during the French Popular Front of 1936-37, and in the United States during the New Deal of the 1930s. These were times when state support rewarded inclusive unions for organizing the unskilled. The bill for mass mobilization usually came later. Each boom was followed by a reaction against the extensive promises of the inclusive labor movement when employers and conservative politicians worked to put labor’s genie back in the bottle.

Solidarity and the Trade Unions

Unionized occupations of the late 1800s

By the late-nineteenth century, trade unions had gained a powerful position in several skilled occupations in the United States and elsewhere. Outside of mining, craft unions were formed among well-paid skilled craft workers — workers whom historian Eric Hobsbawm labeled the “labor aristocracy” (Hobsbawm, 1964; Geary, 1981). In 1892, for example, nearly two-thirds of British coal miners were union members, as were a third of machinists, millwrights and metal workers, cobblers and shoe makers, glass workers, printers, mule spinners, and construction workers (Bain and Price, 1980). French miners had formed relatively strong unions, as had skilled workers in the railroad operating crafts, printers, jewelry makers, cigar makers, and furniture workers (Friedman, 1998). Cigar makers, printers, furniture workers, some construction and metal craftsmen took the lead in early German unions (Kocka, 1986). In the United States, there were about 160,000 union members in 1880, including 120,000 belonging to craft unions, including carpenters, engineers, furniture makers, stone-cutters, iron puddlers and rollers, printers, and several railroad crafts. Another 40,000 belonged to “industrial” unions organized without regard for trade. About half of these were coal miners; most of the rest belonged to the Knights of Labor (KOL) (Friedman, 1999).

The Knights of Labor

In Europe, these craft organizations were to be the basis of larger, mass unions uniting workers without regard for trade or, in some cases, industry (Ansell, 2001). This process began in the United States in the 1880s when craft workers in the Knights of Labor reached out to organize more broadly. Formed by skilled male, native-born garment cutters in 1869, the Knights of Labor would seem an odd candidate to mobilize the mass of unskilled workers. But from a few Philadelphia craft workers, the Knights grew to become a national and even international movement. Membership reached 20,000 in 1881 and grew to 100,000 in 1885. Then, in 1886, when successful strikes on some western railroads attracted a mass of previously unorganized unskilled workers, the KOL grew to a peak membership of a million workers. For a brief time, the Knights of Labor was a general movement of the American working class (Ware, 1929; Voss, 1993).

The KOL became a mass movement with an ideology and program that united workers without regard for occupation, industry, race or gender (Hattam, 1993). Never espousing Marxist or socialist doctrines, the Knights advanced an indigenous form of popular American radicalism, a “republicanism” that would overcome social problems by extending democracy to the workplace. Valuing citizens according to their work, their productive labor, the Knights were true heirs of earlier bourgeois radicals. Open to all producers, including farmers and other employers, they excluded only those seen to be parasitic on the labor of producers — liquor dealers, gamblers, bankers, stock manipulators and lawyers. Welcoming all others without regard for race, gender, or skill, the KOL was the first American labor union to attract significant numbers of women, African-Americans, and the unskilled (Foner, 1974; 1979; Rachleff, 1984).

The KOL’s strategy

In practice, most KOL local assemblies acted like craft unions. They bargained with employers, conducted boycotts, and called members out on strike to demand higher wages and better working conditions. But unlike craft unions that depended on the bargaining leverage of a few strategically positioned workers, the KOL’s tactics reflected its inclusive and democratic vision. Without a craft union’s resources or control over labor supply, the Knights sought to win labor disputes by widening them to involve political authorities and the outside public able to pressure employers to make concessions. Activists hoped that politicizing strikes would favor the KOL because its large membership would tempt ambitious politicians while its members’ poverty drew public sympathy.

In Europe, a strategy like that of the KOL succeeded in promoting the organization of inclusive unions. But it failed in the United States. Comparing the strike strategies of trade unions and the Knights provides insight into the survival and eventual success of the trade unions and their confederation, the American Federation of Labor (AFL) in late-nineteenth century America. Seeking to transform industrial relations, local assemblies of the KOL struck frequently with large but short strikes involving skilled and unskilled workers. The Knights’ industrial leverage depended on political and social influence. It could succeed where trade unions would not go because the KOL strategy utilized numbers, the one advantage held by common laborers. But this strategy could succeed only where political authorities and the outside public might sympathize with labor. Later industrial and regional unions tried the same strategy, conducting short but large strikes. By demonstrating sufficient numbers and commitment, French and Italian unions, for example, would win from state officials concessions they could not force from recalcitrant employers (Shorter and Tilly, 1974; Friedman, 1998). But compared with the small strikes conducted by craft unions, “solidarity” strikes must walk a fine line, aggressive enough to draw attention but not so threatening to provoke a hostile reaction from threatened authorities. Such a reaction doomed the KOL.

The Knights’ collapse in 1886

In 1886, the Knights became embroiled in a national general strike demanding an eight-hour workday, the world’s first May Day. This led directly to the collapse of the KOL. The May Day strike wave in 1886 and the bombing at Haymarket Square in Chicago provoked a “red scare” of historic proportions driving membership down to half a million in September 1887. Police in Chicago, for example, broke up union meetings, seized union records, and even banned the color red from advertisements. The KOL responded politically, sponsoring a wave of independent labor parties in the elections of 1886 and supporting the Populist Party in 1890 (Fink, 1983). But even relatively strong showings by these independent political movements could not halt the KOL’s decline. By 1890, its membership had fallen by half again, and it fell to under 50,000 members by 1897.

Unions and radical political movements in Europe in the late 1800s

The KOL spread outside the United States, attracting an energetic following in the Canada, the United Kingdom, France, and other European countries. Industrial and regional unionism fared better in these countries than in the United States. Most German unionists belonged to industrial unions allied with the Social Democratic Party. Under Marxist leadership, unions and political party formed a centralized labor movement to maximize labor’s political leverage. English union membership was divided between members of a stable core of craft unions and a growing membership in industrial and regional unions based in mining, cotton textiles, and transportation. Allied with political radicals, these industrial and regional unions formed the backbone of the Labor Party, which held the balance of power in British politics after 1906.

The most radical unions were found in France. By the early 1890s, revolutionary syndicalists controlled the national union center, the Confédération générale du travail (or CGT), which they tried to use as a base for a revolutionary general strike where the workers would seize economic and political power. Consolidating craft unions into industrial and regional unions, the Bourses du travail, syndicalists conducted large strikes designed to demonstrate labor’s solidarity. Paradoxically, the syndicalists’ large strikes were effective because they provoked friendly government mediation. In the United States, state intervention was fatal for labor because government and employers usually united to crush labor radicalism. But in France, officials were more concerned to maintain a center-left coalition with organized labor against reactionary employers opposed to the Third Republic. State intervention helped French unionists to win concessions beyond any they could win with economic leverage. A radical strategy of inclusive industrial and regional unionism could succeed in France because the political leadership of the early Third Republic needed labor’s support against powerful economic and social groups who would replace the Republic with an authoritarian regime. Reminded daily of the importance of republican values and the coalition that sustained the Republic, French state officials promoted collective bargaining and labor unions. Ironically, it was the support of liberal state officials that allowed French union radicalism to succeed, and allowed French unions to grow faster than American unions and to organize the semi-skilled workers in the large establishments of France’s modern industries (Friedman, 1997; 1998).

The AFL and American Exceptionalism

By 1914, unions outside the United States had found that broad organization reduced the availability of strike breakers, advanced labor’s political goals, and could lead to state intervention on behalf of the unions. The United States was becoming exceptional, the only advanced capitalist country without a strong, united labor movement. The collapse of the Knights of Labor cleared the way for the AFL. Formed in 1881 as the Federation of Trade and Labor Unions, the AFL was organized to uphold the narrow interests of craft workers against the general interests of common laborers in the KOL. In practice, AFL-craft unions were little labor monopolies, able to win concessions because of their control over uncommon skills and because their narrow strategy did not frighten state officials. Many early AFL leaders, notably the AFL’s founding president Samuel Gompers and P. J. McGuire of the Carpenters, had been active in radical political movements. But after 1886, they learned to reject political involvements for fear that radicalism might antagonize state officials or employers and provoke repression.

AFL successes in the early twentieth-century

Entering the twentieth century, the AFL appeared to have a winning strategy. Union membership rose sharply in the late 1890s, doubling between 1896 and 1900 and again between 1900 and 1904. Fewer than 5 percent of industrial wage earners belonged to labor unions in 1895, but this share rose to 7 percent in 1900 and 13 percent in 1904, including over 21 percent of industrial wage earners (workers outside of commerce, government, and the professions). Half of coal miners in 1904 belonged to an industrial union (the United Mine Workers of America), but otherwise, most union members belonged to craft organizations, including nearly half the printers, and a third of cigar makers, construction workers and transportation workers. As shown in Table 4, other pockets of union strength included skilled workers in the metal trades, leather, and apparel. These craft unions had demonstrated their economic power, raising wages by around 15 percent and reducing hours worked (Friedman, 1991; Mullin, 1993).

Table 4
Unionization rates by industry in the United States, 1880-2000

Industry

1880

1910

1930

1953

1974

1983

2000

Agriculture Forestry Fishing

0.0

0.1

0.4

0.6

4.0

4.8

2.1

Mining

11.2

37.7

19.8

64.7

34.7

21.1

10.9

Construction

2.8

25.2

29.8

83.8

38.0

28.0

18.3

Manufacturing

3.4

10.3

7.3

42.4

37.2

27.9

14.8

Transportation Communication Utilities

3.7

20.0

18.3

82.5

49.8

46.4

24.0

Private Services

0.1

3.3

1.8

9.5

8.6

8.7

4.8

Public Employment

0.3

4.0

9.6

11.3

38.0

31.1

37.5

All Private

1.7

8.7

7.0

31.9

22.4

18.4

10.9

All

1.7

8.5

7.1

29.6

24.8

20.4

14.1

Note: This table shows the unionization rate, the share of workers belonging to unions, in different industries in the United States, 1880-1996.

Limits to the craft strategy

Even at this peak, the craft strategy had clear limits. Craft unions succeeded only in a declining part of American industry among workers still performing traditional tasks where training was through apprenticeship programs controlled by the workers themselves. By contrast, there were few unions in the rapidly growing industries employing semi-skilled workers. Nor was the AFL able to overcome racial divisions and state opposition to organize in the South (Friedman, 2000; Letwin, 1998). Compared with the KOL in the early 1880s, or with France’s revolutionary syndicalist unions, American unions were weak in steel, textiles, chemicals, paper and metal fabrication using technologies without traditional craft skills. AFL strongholds included construction, printing, cigar rolling, apparel cutting and pressing, and custom metal engineering, employed craft workers in relatively small establishments little changed from 25 years earlier (see Table 4).

Dependent on skilled craftsmen’s economic leverage, the AFL was poorly organized to battle large, technologically dynamic corporations. For a brief time, the revolutionary International Workers of the World (IWW), formed in 1905, organized semi-skilled workers in some mass production industries. But by 1914, it too had failed. It was state support that forced powerful French employers to accept unions. Without such assistance, no union strategy could force large American employers to accept unions.

Unions in the World War I Era

The AFL and World War I

For all its limits, it must be acknowledged that the AFL and its craft affiliates survived after their rivals ignited and died. The AFL formed a solid union movement among skilled craftsmen that with favorable circumstances could form the core of a broader union movement like what developed in Europe after 1900. During World War I, the Wilson administration endorsed unionization and collective bargaining in exchange for union support for the war effort. AFL affiliates used state support to organize mass-production workers in shipbuilding, metal fabrication, meatpacking and steel doubling union membership between 1915 and 1919. But when Federal support ended after the war’s end, employers mobilized to crush the nascent unions. The post-war union collapse has been attributed to the AFL’s failings. The larger truth is that American unions needed state support to overcome the entrenched power of capital. The AFL did not fail because of its deficient economic strategy; it failed because it had an ineffective political strategy (Friedman, 1998; Frank, 1994; Montgomery, 1987).

International effects of World War I

War gave labor extraordinary opportunities. Combatant governments rewarded pro-war labor leaders with positions in the expanded state bureaucracy and support for collective bargaining and unions. Union growth also reflected economic conditions when wartime labor shortages strengthened the bargaining position of workers and unions. Unions grew rapidly during and immediately after the war. British unions, for example, doubled their membership between 1914 and 1920, to enroll eight million workers, almost half the nonagricultural labor force (Bain and Price, 1980; Visser, 1989). Union membership tripled in Germany and Sweden, doubled in Canada, Denmark, the Netherlands, and Norway, and almost doubled in the United States (see Table 5 and Table 1). For twelve countries, membership grew by 121 percent between 1913 and 1920, including 119 percent growth in seven combatant countries and 160 percent growth in five neutral states.

Table 5
Impact of World War I on Union Membership Growth
Membership Growth in Wartime and After

12 Countries

7 Combatants

5 Neutrals

War-Time

1913

12 498 000

11 742 000

756 000

1920

27 649 000

25 687 000

1 962 000

Growth 1913-20:

121%

119%

160%

Post-war

1920

27 649 000

1929

18 149 000

Growth 1920-29:

-34%

Shift toward the revolutionary left

Even before the war, frustration with the slow pace of social reform had led to a shift towards the revolutionary socialist and syndicalist left in Germany, the United Kingdom, and the United States (Nolan, 1981; Montgomery, 1987). In Europe, frustrations with rising prices, declining real wages and working conditions, and anger at catastrophic war losses fanned the flames of discontent into a raging conflagration. Compared with pre-war levels, the number of strikers rose ten or even twenty times after the war, including 2.5 million strikers in France in 1919 and 1920, compared with 200,000 strikers in 1913, 13 million German strikers, up from 300,000 in 1913, and 5 million American strikers, up from under 1 million in 1913. British Prime Minister Lloyd George warned in March 1919 that “The whole of Europe is filled with the spirit of revolution. There is a deep sense not only of discontent, but of anger and revolt among the workmen . . . The whole existing order in its political, social and economic aspects is questioned by the masses of the population from one end of Europe to the other” (quoted in Cronin, 1983: 22).

Impact of Communists

Inspired by the success of the Bolshevik revolution in Russia, revolutionary Communist Parties were organized throughout the world to promote revolution by organizing labor unions, strikes, and political protest. Communism was a mixed blessing for labor. The Communists included some of labor’s most dedicated activists and organizers who contributed greatly to union organization. But Communist help came at a high price. Secretive, domineering, intolerant of opposition, the Communists divided unions between their dwindling allies and a growing collection of outraged opponents. Moreover, they galvanized opposition, depriving labor of needed allies among state officials and the liberal bourgeoisie.

The “Lean Years”: Welfare Capitalism and the Open Shop

Aftermath of World War I

As with most great surges in union membership, the postwar boom was self-limiting. Helped by a sharp post- war economic contraction, employers and state officials ruthlessly drove back the radical threat, purging their workforce of known union activists and easily absorbing futile strikes during a period of rising unemployment. Such campaigns drove membership down by a third from a 1920 peak of 26 million members in eleven countries in 1920 to fewer than 18 million in 1924. In Austria, France, Germany, and the United States, labor unrest contributed to the election of conservative governments; in Hungary, Italy, and Poland it led to the installation of anti- democratic dictatorships that ruthlessly crushed labor unions. Economic stagnation, state repression, and anti-union campaigns by employers prevented any union resurgence through the rest of the 1920s. By 1929, unions in these eleven countries had added only 30,000 members, one-fifth of one percent.

Injunctions and welfare capitalism

The 1920s was an especially dark period for organized labor in the United States where weaknesses visible before World War I became critical failures. Labor’s opponents used fear of Communism to foment a post-war red scare that targeted union activists for police and vigilante violence. Hundreds of foreign-born activists were deported, and mobs led by the American Legion and the Ku Klux Klan broke up union meetings and destroyed union offices (see, for example, Frank, 1994: 104-5). Judges added law to the campaign against unions. Ignoring the intent of the Clayton Anti-Trust Act (1914) they used anti-trust law and injunctions against unions, forbidding activists from picketing or publicizing disputes, holding signs, or even enrolling new union members. Employers competed for their workers’ allegiance, offering paternalist welfare programs and systems of employee representation as substitutes for independent unions. They sought to build a nonunion industrial relations system around welfare capitalism (Cohen, 1990).

Stagnation and decline

After the promises of the war years, the defeat of postwar union drives in mass production industries like steel and meatpacking inaugurated a decade of union stagnation and decline. Membership fell by a third between 1920 and 1924. Unions survived only in the older trades where employment was usually declining. By 1924, they were almost completely eliminated from the dynamic industries of the second industrial revolution: including steel, automobiles, consumer electronics, chemicals and rubber manufacture.

New Deals for Labor

Great Depression

The nonunion industrial relations system of the 1920s might have endured and produced a docile working class organized in company unions (Brody, 1985). But the welfare capitalism of the 1920s collapsed when the Great Depression of the 1930s exposed its weaknesses and undermined political support for the nonunion, open shop. Between 1929 and 1933, real national income in the United States fell by one third, nonagricultural employment fell by a quarter, and unemployment rose from under 2 million in 1929 to 13 million in 1933, a quarter of the civilian labor force. Economic decline was nearly as great elsewhere, raising unemployment to over 15 percent in Austria, Canada, Germany, and the United Kingdom (Maddison, 1991: 260-61). Only the Soviet Union, with its authoritarian political economy was largely spared the scourge of unemployment and economic collapse — a point emphasized by Communists throughout the 1930s and later. Depression discredited the nonunion industrial relations system by forcing welfare capitalists to renege on promises to stabilize employment and to maintain wages. Then, by ignoring protests from members of employee representation plans, welfare capitalists further exposed the fundamental weakness of their system. Lacking any independent support, paternalist promises had no standing but depended entirely on the variable good will of employers. And sometimes that was not enough (Cohen, 1990).

Depression-era political shifts

Voters, too, lost confidence in employers. The Great Depression discredited the old political economy. Even before Franklin Roosevelt’s election as President of the United States in 1932, American states enacted legislation restricting the rights of creditors and landlords, restraining the use of the injunction in labor disputes, and providing expanded relief for the unemployed (Ely, 1998; Friedman, 2001). European voters abandoned centrist parties, embracing extremists of both left and right, Communists and Fascists. In Germany, the Nazis won, but Popular Front governments uniting Communists and socialists with bourgeois liberals assumed power in other countries, including Sweden, France and Spain. (The Spanish Popular Front was overthrown by a Fascist rebellion that installed a dictatorship led by Francisco Franco.) Throughout there was an impulse to take public control over the economy because free market capitalism and orthodox finance had led to disaster (Temin, 1990).

Economic depression lowers union membership when unemployed workers drop their membership and employers use their stronger bargaining position to defeat union drives (Bain and Elsheikh, 1976). Indeed, union membership fell with the onset of the Great Depression but, contradicting the usual pattern, membership rebounded sharply after 1932 despite high unemployment, rising by over 76 percent in ten countries by 1938 (see Table 6 and Table 1). The fastest growth came in countries with openly pro-union governments. In France, where the Socialist Léon Blum led a Popular Front government, and the United States, during Franklin Roosevelt’s New Deal, membership rose by 160 percent 1933-38. But membership grew by 33 percent in eight other countries even without openly pro-labor governments.

Table 6
Impact of the Great Depression and World War II on Union Membership Growth

11 Countries (no Germany)

10 Countries (no Austria)

Depression

1929

12 401 000

11 508 000

1933

11 455 000

10 802 000

Growth 1929-33

-7.6%

-6.1%

Popular Front Period

1933

10 802 000

1938

19 007 000

Growth 1933-38

76.0%

Second World War

1938

19 007 000

1947

35 485 000

Growth 1938-47

86.7%

French unions and the Matignon agreements

French union membership rose from under 900,000 in 1935 to over 4,500,000 in 1937. The Popular Front’s victory in the elections of June 1936 precipitated a massive strike wave and the occupation of factories and workplaces throughout France. Remembered in movie, song and legend, the factory occupations were a nearly spontaneous uprising of French workers that brought France’s economy to a halt. Contemporaries were struck by the extraordinarily cheerful feelings that prevailed, the “holiday feeling” and sense that the strikes were a new sort of non-violent revolution that would overturn hierarchy and replace capitalist authoritarianism with true social democracy (Phillippe and Dubief, 1993: 307-8). After Blum assumed office, he brokered the Matignon agreements, named after the premier’s official residence in Paris. Union leaders and heads of France’s leading employer associations agreed to end the strikes and occupations in exchange for wage increases of around 15 percent, a 40 hour workweek, annual vacations, and union recognition. Codified in statute by the Popular Front government, French unions gained new rights and protections from employer repression. Only then did workers flock into unions. In a few weeks, French unions gained four million members with the fastest growth in the new industries of the second industrial revolution. Unions in metal fabrication and chemicals grew by 1,450 percent and 4,000 percent respectively (Magraw, 1992: 2, 287-88).

French union leader Léon Jouhaux hailed the Matignon agreements as “the greatest victory of the workers’ movement.” It included lasting gains, including annual vacations and shorter workweeks. But Simone Weil described the strikers of May 1936 as “soldiers on leave,” and they were soon returned to work. Regrouping, employers discharged union activists and attacked the precarious unity of the Popular Front government. Fighting an uphill battle against renewed employer resistance, the Popular Front government fell before it could build a new system of cooperative industrial relations. Contained, French unions were unable to maintain their momentum towards industrial democracy. Membership fell by a third in 1937-39.

The National Industrial Recovery Act

A different union paradigm was developed in the United States. Rather than vehicles for a democratic revolution, the New Deal sought to integrate organized labor into a reformed capitalism that recognized capitalist hierarchy in the workplace, using unions only to promote macroeconomic stabilization by raising wages and consumer spending (Brinkley, 1995). Included as part of a program for economic recovery was section 7(a) of the National Industrial Recovery Act (NIRA) giving “employees . . . the right to organize and bargain collectively through representatives of their own choosing . . . free from the interference, restraint, or coercion of employers.” AFL-leader William Green pronounced this a “charter of industrial freedom” and workers rushed into unions in a wave unmatched since the Knights of Labor in 1886. As with the KOL, the greatest increase came among the unskilled. Coal miners, southern textile workers, northern apparel workers, Ohio tire makers, Detroit automobile workers, aluminum, lumber and sawmill workers all rushed into unions. For the first time in fifty years, American unions gained a foothold in mass production industries.

AFL’s lack of enthusiasm

Promises of state support brought common laborers into unions. But once there, the new unionists received little help from aging AFL leaders. Fearing that the new unionists’ impetuous zeal and militant radicalism would provoke repression, AFL leaders tried to scatter the new members among contending craft unions with archaic craft jurisdictions. The new unionists were swept up in the excitement of unity and collective action but a half-century of experience had taught the AFL’s leadership to fear such enthusiasms.

The AFL dampened the union boom of 1933-34, but, again, the larger problem was not with the AFL’s flawed tactics but with its lack of political leverage. Doing little to enforce the promises of Section 7(a), the Federal government left employers free to ignore the law. Some flatly prohibited union organization; others formally honored the law but established anemic employee representation plans while refusing to deal with independent unions (Irons, 2000). By 1935 almost as many industrial establishments had employer-dominated employee- representation plans (27 percent) as had unions (30 percent). The greatest number had no labor organization at all (43 percent).

Birth of the CIO

Implacable management resistance and divided leadership killed the early New Deal union surge. It died even before the NIRA was ruled unconstitutional in 1935. Failure provoked rebellion within the AFL. Led by John L. Lewis of the United Mine Workers, eight national unions launched a campaign for industrial organization as the Committee for Industrial Organization. After Lewis punched Carpenter’s Union leader William L Hutcheson on the floor of the AFL convention in 1935, the Committee became an independent Congress of Industrial Organization (CIO). Including many Communist activists, CIO committees fanned out to organize workers in steel, automobiles, retail trade, journalism and other industries. Building effectively on local rank and file militancy, including sitdown strikes in automobiles, rubber, and other industries, the CIO quickly won contracts from some of the strongest bastions of the open shop, including United States Steel and General Motors (Zieger, 1995).

The Wagner Act

Creative strategy and energetic organizing helped. But the CIO owed its lasting success to state support. After the failure of the NIRA, New Dealers sought another way to strengthen labor as a force for economic stimulus. This led to the enactment in 1935 of the National Labor Relations Act, also known as the “Wagner Act.” The Wagner Act established a National Labor Relations Board charged to enforce employees’ “right to self-organization, to form, join, or assist labor organizations to bargain collectively through representatives of their own choosing and to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection.” It provided for elections to choose union representation and required employers to negotiate “in good faith” with their workers’ chosen representatives. Shifting labor conflict from strikes to elections and protecting activists from dismissal for their union work, the Act lowered the cost to individual workers of supporting collective action. It also put the Federal government’s imprimatur on union organization.

Crucial role of rank-and-file militants and state government support

Appointed by President Roosevelt, the first NLRB was openly pro-union, viewing the Act’s preamble as mandate to promote organization. By 1945 the Board had supervised 24,000 union elections involving some 6,000,000 workers, leading to the unionization of nearly 5,000,000 workers. Still, the NLRB was not responsible for the period’s union boom. The Wagner Act had no direct role in the early CIO years because it was ignored for two years until its constitutionality was established by the Supreme Court in National Labor Relations Board v. Jones and Laughlin Steel Company (1937). Furthermore, the election procedure’s gross contribution of 5,000,000 members was less than half of the period’s net union growth of 11,000,000 members. More important than the Wagner Act were crucial union victories over prominent open shop employers in cities like Akron, Ohio, Flint, Michigan, and among Philadelphia-area metal workers. Dedicated rank-and-file militants and effective union leadership were crucial in these victories. As important was the support of pro-New Deal local and state governments. The Roosevelt landslides of 1934 and 1936 brought to office liberal Democratic governors and mayors who gave crucial support to the early CIO. Placing a right to collective bargaining above private property rights, liberal governors and other elected officials in Michigan, Ohio, Pennsylvania and elsewhere refused to send police to evict sit-down strikers who had seized control of factories. This state support allowed the minority of workers who actively supported unionization to use force to overcome the passivity of the majority of workers and the opposition of the employers. The Open Shop of the 1920s was not abandoned; it was overwhelmed by an aggressive, government-backed labor movement (Gall, 1999; Harris, 2000).

World War II

Federal support for union organization was also crucial during World War II. Again, war helped unions both by eliminating unemployment and because state officials supported unions to gain support for the war effort. Established to minimize labor disputes that might disrupt war production, the National War Labor Board instituted a labor truce where unions exchanged a no-strike pledge for employer recognition. During World War II, employers conceded union security and “maintenance of membership” rules requiring workers to pay their union dues. Acquiescing to government demands, employers accepted the institutionalization of the American labor movement, guaranteeing unions a steady flow of dues to fund an expanded bureaucracy, new benefit programs, and even to raise funds for political action. After growing from 3.5 to 10.2 million members between 1935 and 1941, unions added another 4 million members during the war. “Maintenance of membership” rules prevented free riders even more effectively than had the factory takeovers and violence of the late-1930s. With millions of members and money in the bank, labor leaders like Sidney Hillman and Phillip Murray had the ear of business leaders and official Washington. Large, established, and respected: American labor had made it, part of a reformed capitalism committed to both property and prosperity.

Even more than the First World War, World War Two promoted unions and social change. A European civil war, the war divided the continent not only between warring countries but within countries between those, usually on the political right, who favored fascism over liberal parliamentary government and those who defended democracy. Before the war, left and right contended over the appeasement of Nazi Germany and fascist Italy; during the war, many businesses and conservative politicians collaborated with the German occupation against a resistance movement dominated by the left. Throughout Europe, victory over Germany was a triumph for labor that led directly to the entry into government of socialists and Communists.

Successes and Failures after World War II

Union membership exploded during and after the war, nearly doubling between 1938 and 1946. By 1947, unions had enrolled a majority of nonagricultural workers in Scandinavia, Australia, and Italy, and over 40 percent in most other European countries (see Table 1). Accumulated depression and wartime grievances sparked a post- war strike wave that included over 6 million strikers in France in 1948, 4 million in Italy in 1949 and 1950, and 5 million in the United States in 1946. In Europe, popular unrest led to a dramatic political shift to the left. The Labor Party government elected in the United Kingdom in 1945 established a new National Health Service, and nationalized mining, the railroads, and the Bank of England. A center-left post-war coalition government in France expanded the national pension system and nationalized the Bank of France, Renault, and other companies associated with the wartime Vichy regime. Throughout Europe, the share of national income devoted to social services jumped dramatically, as did the share of income going to the working classes.

Europeans unions and the state after World War II

Unions and the political left were stronger everywhere throughout post-war Europe, but in some countries labor’s position deteriorated quickly. In France, Italy, and Japan, the popular front uniting Communists, socialists, and bourgeois liberals dissolved, and labor’s management opponents recovered state support, with the onset of the Cold War. In these countries, union membership dropped after 1947 and unions remained on the defensive for over a decade in a largely adversarial industrial relations system. Elsewhere, notably in countries with weak Communist movements, such as in Scandinavia but also in Austria, Germany, and the Netherlands, labor was able to compel management and state officials to accept strong and centralized labor movements as social partners. In these countries, stable industrial relations allowed cooperation between management and labor to raise productivity and to open new markets for national companies. High-union-density and high-union-centralization allowed Scandinavian and German labor leaders to negotiate incomes policies with governments and employers restraining wage inflation in exchange for stable employment, investment, and wages linked to productivity growth. Such policies could not be instituted in countries with weaker and less centralized labor movements, including France, Italy, Japan, the United Kingdom and the United States because their unions had not been accepted as bargaining partners by management and they lacked the centralized authority to enforce incomes policies and productivity bargains (Alvarez, Garrett, and Lange, 1992).

Europe since the 1960s

Even where European labor was the weakest, in France or Italy in the 1950s, unions were stronger than before World War II. Working with entrenched socialist and labor political parties, European unions were able to maintain high wages, restrictions on managerial autonomy, and social security. The wave of popular unrest in the late 1960s and early 1970s would carry most European unions to new heights, briefly bringing membership to over 50 percent of the labor force in the United Kingdom and in Italy, and bringing socialists into the government in France, Germany, Italy, and the United Kingdom. Since 1980, union membership has declined some and there has been some retrenchment in the welfare state. But the essentials of European welfare states and labor relations have remained (Western, 1997; Golden and Pontusson, 1992).

Unions begin to decline in the US

It was after World War II that American Exceptionalism became most valid, when the United States emerged as the advanced, capitalist democracy with the weakest labor movement. The United States was the only advanced capitalist democracy where unions went into prolonged decline right after World War II. At 35 percent, the unionization rate in 1945 was the highest in American history, but even then it was lower than in most other advanced capitalist economies. It has been falling since. The post-war strike wave, including three million strikers in 1945 and five million in 1946, was the largest in American history but it did little to enhance labor’s political position or bargaining leverage. Instead, it provoked a powerful reaction among employers and others suspicious of growing union power. A concerted drive by the CIO to organize the South, “Operation Dixie,” failed dismally in 1946. Unable to overcome private repression, racial divisions, and the pro-employer stance of southern local and state governments, the CIO’s defeat left the South as a nonunion, low-wage domestic enclave and a bastion of anti- union politics (Griffith, 1988). Then, in 1946, a conservative Republican majority was elected to Congress, dashing hopes for a renewed, post-war New Deal.

The Taft-Hartley Act and the CIO’s Expulsion of Communists

Quickly, labor’s wartime dreams turned to post-war nightmares. The Republican Congress amended the Wagner Act, enacting the Taft-Hartley Act in 1947 to give employers and state officials new powers against strikers and unions. The law also required union leaders to sign a non-Communist affidavit as a condition for union participation in NLRB-sponsored elections. This loyalty oath divided labor during a time of weakness. With its roots in radical politics and an alliance of convenience between Lewis and the Communists, the CIO was torn by the new Red Scare. Hoping to appease the political right, the CIO majority in 1949 expelled ten Communist-led unions with nearly a third of the organization’s members. This marked the end of the CIO’s expansive period. Shorn of its left, the CIO lost its most dynamic and energetic organizers and leaders. Worse, it plunged the CIO into a civil war; non-Communist affiliates raided locals belonging to the “communist-led” unions fatally distracting both sides from the CIO’s original mission to organize the unorganized and empower the dispossessed. By breaking with the Communists, the CIO’s leadership signaled that it had accepted its place within a system of capitalist hierarchy. Little reason remained for the CIO to remain independent. In 1955 it merged with the AFL to form the AFL-CIO.

The Golden Age of American Unions

Without the revolutionary aspirations now associated with the discredited Communists, America’s unions settled down to bargain over wages and working conditions without challenging such managerial prerogatives as decisions about prices, production, and investment. Some labor leaders, notably James Hoffa of the Teamsters but also local leaders in construction and service trades, abandoned all higher aspirations to use their unions for purely personal financial gain. Allying themselves with organized crime, they used violence to maintain their power over employers and their own rank-and-file membership. Others, including former-CIO leaders, like Walter Reuther of the United Auto Workers, continued to push the envelope of legitimate bargaining topics, building challenges to capitalist authority at the workplace. But even the UAW was unable to force major managerial prerogatives onto the bargaining table.

The quarter century after 1950 formed a ‘golden age’ for American unions. Established unions found a secure place at the bargaining table with America’s leading firms in such industries as autos, steel, trucking, and chemicals. Contracts were periodically negotiated providing for the exchange of good wages for cooperative workplace relations. Rules were negotiated providing a system of civil authority at work, with negotiated regulations for promotion and layoffs, and procedures giving workers opportunities to voice grievances before neutral arbitrators. Wages rose steadily, by over 2 percent per year and union workers earned a comfortable 20 percent more than nonunion workers of similar age, experience and education. Wages grew faster in Europe but American wages were higher and growth was rapid enough to narrow the gap between rich and poor, and between management salaries and worker wages. Unions also won a growing list of benefit programs, medical and dental insurance, paid holidays and vacations, supplemental unemployment insurance, and pensions. Competition for workers forced many nonunion employers to match the benefit packages won by unions, but unionized employers provided benefits worth over 60 percent more than were given nonunion workers (Freeman and Medoff, 1984; Hirsch and Addison, 1986).

Impact of decentralized bargaining in the US

In most of Europe, strong labor movements limit the wage and benefit advantages of union membership by forcing governments to extend union gains to all workers in an industry regardless of union status. By compelling nonunion employers to match union gains, this limited the competitive penalty borne by unionized firms. By contrast, decentralized bargaining and weak unions in the United States created large union wage differentials that put unionized firms at a competitive disadvantage, encouraging them to seek out nonunion labor and localities. A stable and vocal workforce with more experience and training did raise unionized firms’ labor productivity by 15 percent or more above the level of nonunion firms and some scholars have argued that unionized workers earn much of their wage gain. Others, however, find little productivity gain for unionized workers after account is taken of greater use of machinery and other nonlabor inputs by unionized firms (compare Freeman and Medoff, 1984 and Hirsch and Addison, 1986). But even unionized firms with higher labor productivity were usually more conscious of the wages and benefits paid to union worker than they were of unionization’s productivity benefits.

Unions and the Civil Rights Movement

Post-war unions remained politically active. European unions were closely associated with political parties, Communists in France and Italy, socialists or labor parties elsewhere. In practice, notwithstanding revolutionary pronouncements, even the Communist’s political agenda came to resemble that of unions in the United States, liberal reform including a commitment to full employment and the redistribution of income towards workers and the poor (Boyle, 1998). Golden age unions have also been at the forefront of campaigns to extend individual rights. The major domestic political issue of the post-war United States, civil rights, was troubling for many unions because of the racist provisions in their own practice. Nonetheless, in the 1950s and 1960s, the AFL-CIO strongly supported the civil rights movement, funded civil rights organizations and lobbied in support of civil rights legislation. The AFL-CIO pushed unions to open their ranks to African-American workers, even at the expense of losing affiliates in states like Mississippi. Seizing the opportunity created by the civil rights movement, some unions gained members among nonwhites. The feminist movement of the 1970s created new challenges for the masculine and sometimes misogynist labor movement. But, here too, the search for members and a desire to remove sources of division eventually brought organized labor to the forefront. The AFL-CIO supported the Equal Rights Amendment and began to promote women to leadership positions.

Shift of unions to the public sector

In no other country have women and members of racial minorities assumed such prominent positions in the labor movement as they have in the United States. The movement of African-American and women to leadership positions in the late-twentieth century labor movement was accelerated by a shift in the membership structure of the United States union movement. Maintaining their strength in traditional, masculine occupations in manufacturing, construction, mining, and transportation, European unions remained predominantly male. Union decline in these industries combined with growth in heavily female public sector employments in the United States led to the femininization of the American labor movement. Union membership began to decline in the private sector in the United States immediately after World War II. Between 1953 and 1983, for example, the unionization rate fell from 42 percent to 28 percent in manufacturing, by nearly half in transportation, and by over half in construction and mining (see Table 4). By contrast, after 1960, public sector workers won new opportunities to form unions. Because women and racial minorities form a disproportionate share of these public sector workers, increasing union membership there has changed the American labor movement’s racial and gender composition. Women comprised only 19 percent of American union members in the mid-1950s but their share rose to 40 percent by the late 1990s. By then, the most unionized workers were no longer the white male skilled craftsmen of old. Instead, they were nurses, parole officers, government clerks, and most of all, school teachers.

Union Collapse and Union Avoidance in the US

Outside the United States, unions grew through the 1970s and, despite some decline since the 1980s, European and Canadian unions remain large and powerful. The United States is different. Union decline since World War II has brought the United States private-sector labor movement down to early twentieth century levels. As a share of the nonagricultural labor force, union membership fell from its 1945 peak of 35 percent down to under 30 percent in the early 1970s. From there, decline became a general rout. In the 1970s, rising unemployment, increasing international competition, and the movement of industry to the nonunion South and to rural areas undermined the bargaining position of many American unions leaving them vulnerable to a renewed management offensive. Returning to pre-New Deal practices, some employers established new welfare and employee representation programs, hoping to lure worker away from unions (Heckscher, 1987; Jacoby, 1997). Others returned to pre-New Deal repression. By the early 1980s, union avoidance had become an industry. Anti-union consultants and lawyers openly counseled employers how to use labor law to evade unions. Findings of employers’ unfair labor practices in violation of the Wagner Act tripled in the 1970s; by the 1980s, the NLRB reinstated over 10,000 workers a year who were illegally discharged for union activity, nearly one for every twenty who voted for a union in an NLRB election (Weiler, 1983). By the 1990s, the unionization rate in the United States fell to under 14 percent, including only 9 percent of the private sector workers and 37 percent of those in the public sector. Unions now have minimal impact on wages or working conditions for most American workers.

Nowhere else have unions collapsed as in the United States. With a unionization rate dramatically below that of other countries, including Canada, the United States has achieved exceptional status (see Table 7). There remains great interest in unions among American workers; where employers do not resist, unions thrive. In the public sector and in some private employers where workers have free choice to join a union, they are as likely as they ever were, and as likely as workers anywhere. In the past, as after 1886 and in the 1920s, when American employers broke unions, they revived when a government committed to workplace democracy sheltered them from employer repression. If we see another such government, we may yet see another union revival.

Table 7
Union Membership Rates for the United States and Six Other Leading Industrial Economies, 1970 to 1990

1970

1980

1990

U.S.: Unionization Rate: All industries

30.0

24.7

17.6

U.S.: Unionization Rate: Manufacturing

41.0

35.0

22.0

U.S.: Unionization Rate: Financial services

5.0

4.0

2.0

Six Countries: Unionization Rate: All industries

37.1

39.7

35.3

Six Countries: Unionization Rate: Manufacturing

38.8

44.0

35.2

Five Countries: Unionization Rate: Financial services

23.9

23.8

24.0

Ratio: U.S./Six Countries: All industries

0.808

0.622

0.499

Ratio: U.S./Six Countries: Manufacturing

1.058

0.795

0.626

Ratio: U.S./Five Countries: Financial services

0.209

0.168

0.083

Note: The unionization rate reported is the number of union members out of 100 workers in the specified industry. The ratio shown is the unionization rate for the United States divided by the unionization rate for the other countries. The six countries are Canada, France, Germany, Italy, Japan, and the United Kingdom. Data on union membership in financial services in France are not available.

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Joshua Rosenbloom, University of Kansas

One of the most important implications of modern microeconomic theory is that perfectly competitive markets produce an efficient allocation of resources. Historically, however, most markets have not approached the level of organization of this theoretical ideal. Instead of the costless and instantaneous communication envisioned in theory, market participants must rely on a set of incomplete and often costly channels of communication to learn about conditions of supply and demand; and they may face significant transaction costs to act on the information that they have acquired through these channels.

The economic history of labor market institutions is concerned with identifying the mechanisms that have facilitated the allocation of labor effort in the economy at different times, tracing the historical processes by which they have responded to shifting circumstances, and understanding how these mechanisms affected the allocation of labor as well as the distribution of labor’s products in different epochs.

Labor market institutions include both formal organizations (such as union hiring halls, government labor exchanges, and third party intermediaries such as employment agents), and informal mechanisms of communication such as word-of-mouth about employment opportunities passed between family and friends. The impact of these institutions is broad ranging. It includes the geographic allocation of labor (migration and urbanization), decisions about education and training of workers (investment in human capital), inequality (relative wages), the allocation of time between paid work and other activities such as household production, education, and leisure, and fertility (the allocation of time between production and reproduction).

Because each worker possesses a unique bundle of skills and attributes and each job is different, labor market transactions require the communication of a relatively large amount of information. In other words, the transactions costs involved in the exchange of labor are relatively high. The result is that the barriers separating different labor markets have sometimes been quite high, and these markets are relatively poorly integrated with one another.

The frictions inherent in the labor market mean that even during macroeconomic expansions there may be both a significant number of unemployed workers and a large number of unfilled vacancies. When viewed from some distance and looked at in the long-run, however, what is most striking is how effective labor market institutions have been in adapting to the shifting patterns of supply and demand in the economy. Over the past two centuries American labor markets have accomplished a massive redistribution of labor out of agriculture into manufacturing, and then from manufacturing into services. At the same time they have accomplished a huge geographic reallocation of labor between the United States and other parts of the world as well as within the United States itself, both across states and regions and from rural locations to urban areas.

This essay is organized topically, beginning with a discussion of the evolution of institutions involved in the allocation of labor across space and then taking up the development of institutions that fostered the allocation of labor across industries and sectors. The third section considers issues related to labor market performance.

The Geographic Distribution of Labor

One of the dominant themes of American history is the process of European settlement (and the concomitant displacement of the native population). This movement of population is in essence a labor market phenomenon. From the beginning of European settlement in what became the United States, labor markets were characterized by the scarcity of labor in relation to abundant land and natural resources. Labor scarcity raised labor productivity and enabled ordinary Americans to enjoy a higher standard of living than comparable Europeans. Counterbalancing these inducements to migration, however, were the high costs of travel across the Atlantic and the significant risks posed by settlement in frontier regions. Over time, technological changes lowered the costs of communication and transportation. But exploiting these advantages required the parallel development of new labor market institutions.

Trans-Atlantic Migration in the Colonial Period

During the seventeenth and eighteenth centuries a variety of labor market institutions developed to facilitate the movement of labor in response to the opportunities created by American factor proportions. While some immigrants migrated on their own, the majority of immigrants were either indentured servants or African slaves.

Because of the cost of passage—which exceeded half a year’s income for a typical British immigrant and a full year’s income for a typical German immigrant—only a small portion of European migrants could afford to pay for their passage to the Americas (Grubb 1985a). They did so by signing contracts, or “indentures,” committing themselves to work for a fixed number of years in the future—their labor being their only viable asset—with British merchants, who then sold these contracts to colonists after their ship reached America. Indentured servitude was introduced by the Virginia Company in 1619 and appears to have arisen from a combination of the terms of two other types of labor contract widely used in England at the time: service in husbandry and apprenticeship (Galenson 1981). In other cases, migrants borrowed money for their passage and committed to repay merchants by pledging to sell themselves as servants in America, a practice known as “redemptioner servitude (Grubb 1986). Redemptioners bore increased risk because they could not predict in advance what terms they might be able to negotiate for their labor, but presumably they did so because of other benefits, such as the opportunity to choose their own master, and to select where they would be employed.

Although data on immigration for the colonial period are scattered and incomplete a number of scholars have estimated that between half and three quarters of European immigrants arriving in the colonies came as indentured or redemptioner servants. Using data for the end of the colonial period Grubb (1985b) found that close to three-quarters of English immigrants to Pennsylvania and nearly 60 percent of German immigrants arrived as servants.

A number of scholars have examined the terms of indenture and redemptioner contracts in some detail (see, e.g., Galenson 1981; Grubb 1985a). They find that consistent with the existence of a well-functioning market, the terms of service varied in response to differences in individual productivity, employment conditions, and the balance of supply and demand in different locations.

The other major source of labor for the colonies was the forced migration of African slaves. Slavery had been introduced in the West Indies at an early date, but it was not until the late seventeenth century that significant numbers of slaves began to be imported into the mainland colonies. From 1700 to 1780 the proportion of blacks in the Chesapeake region grew from 13 percent to around 40 percent. In South Carolina and Georgia, the black share of the population climbed from 18 percent to 41 percent in the same period (McCusker and Menard, 1985, p. 222). Galenson (1984) explains the transition from indentured European to enslaved African labor as the result of shifts in supply and demand conditions in England and the trans-Atlantic slave market. Conditions in Europe improved after 1650, reducing the supply of indentured servants, while at the same time increased competition in the slave trade was lowering the price of slaves (Dunn 1984). In some sense the colonies’ early experience with indentured servants paved the way for the transition to slavery. Like slaves, indentured servants were unfree, and ownership of their labor could be freely transferred from one owner to another. Unlike slaves, however, they could look forward to eventually becoming free (Morgan 1971).

Over time a marked regional division in labor market institutions emerged in colonial America. The use of slaves was concentrated in the Chesapeake and Lower South, where the presence of staple export crops (rice, indigo and tobacco) provided economic rewards for expanding the scale of cultivation beyond the size achievable with family labor. European immigrants (primarily indentured servants) tended to concentrate in the Chesapeake and Middle Colonies, where servants could expect to find the greatest opportunities to enter agriculture once they had completed their term of service. While New England was able to support self-sufficient farmers, its climate and soil were not conducive to the expansion of commercial agriculture, with the result that it attracted relatively few slaves, indentured servants, or free immigrants. These patterns are illustrated in Table 1, which summarizes the composition and destinations of English emigrants in the years 1773 to 1776.

Table 1

English Emigration to the American Colonies, by Destination and Type, 1773-76

Total Emigration

Destination

Number

Percentage

Percent listed as servants

New England

54

1.20

1.85

Middle Colonies

1,162

25.78

61.27

New York

303

6.72

11.55

Pennsylvania

859

19.06

78.81

Chesapeake

2,984

66.21

96.28

Maryland

2,217

49.19

98.33

Virginia

767

17.02

90.35

Lower South

307

6.81

19.54

Carolinas

106

2.35

23.58

Georgia

196

4.35

17.86

Florida

5

0.11

0.00

Total

4,507

80.90

Source: Grubb (1985b, p. 334).

International Migration in the Nineteenth and Twentieth Centuries

American independence marks a turning point in the development of labor market institutions. In 1808 Congress prohibited the importation of slaves. Meanwhile, the use of indentured servitude to finance the migration of European immigrants fell into disuse. As a result, most subsequent migration was at least nominally free migration.

The high cost of migration and the economic uncertainties of the new nation help to explain the relatively low level of immigration in the early years of the nineteenth century. But as the costs of transportation fell, the volume of immigration rose dramatically over the course of the century. Transportation costs were of course only one of the obstacles to international population movements. At least as important were problems of communication. Potential migrants might know in a general way that the United States offered greater economic opportunities than were available at home, but acting on this information required the development of labor market institutions that could effectively link job-seekers with employers.

For the most part, the labor market institutions that emerged in the nineteenth century to direct international migration were “informal” and thus difficult to document. As Rosenbloom (2002, ch. 2) describes, however, word-of-mouth played an important role in labor markets at this time. Many immigrants were following in the footsteps of friends or relatives already in the United States. Often these initial pioneers provided material assistance—helping to purchase ship and train tickets, providing housing—as well as information. The consequences of this so-called “chain migration” are readily reflected in a variety of kinds of evidence. Numerous studies of specific migration streams have documented the role of a small group of initial migrants in facilitating subsequent migration (for example, Barton 1975; Kamphoefner 1987; Gjerde 1985). At a more aggregate level, settlement patterns confirm the tendency of immigrants from different countries to concentrate in different cities (Ward 1971, p. 77; Galloway, Vedder and Shukla 1974).

Informal word-of-mouth communication was an effective labor market institution because it served both employers and job-seekers. For job-seekers the recommendations of friends and relatives were more reliable than those of third parties and often came with additional assistance. For employers the recommendations of current employees served as a kind of screening mechanism, since their employees were unlikely to encourage the immigration of unreliable workers.

While chain migration can explain a quantitatively large part of the redistribution of labor in the nineteenth century it is still necessary to explain how these chains came into existence in the first place. Chain migration always coexisted with another set of more formal labor market institutions that grew up largely to serve employers who could not rely on their existing labor force to recruit new hires (such as railroad construction companies). Labor agents, often themselves immigrants, acted as intermediaries between these employers and job-seekers, providing labor market information and frequently acting as translators for immigrants who could not speak English. Steamship companies operating between Europe and the United States also employed agents to help recruit potential migrants (Rosenbloom 2002, ch. 3).

By the 1840s networks of labor agents along with boarding houses serving immigrants and other similar support networks were well established in New York, Boston, and other major immigrant destinations. The services of these agents were well documented in published guides and most Europeans considering immigration must have known that they could turn to these commercial intermediaries if they lacked friends and family to guide them. After some time working in America these immigrants, if they were successful, would find steadier employment and begin to direct subsequent migration, thus establishing a new link in the stream of chain migration.

The economic impacts of immigration are theoretically ambiguous. Increased labor supply, by itself, would tend to lower wages—benefiting employers and hurting workers. But because immigrants are also consumers, the resulting increase in demand for goods and services will increase the demand for labor, partially offsetting the depressing effect of immigration on wages. As long as the labor to capital ratio rises, however, immigration will necessarily lower wages. But if, as was true in the late nineteenth century, foreign lending follows foreign labor, then there may be no negative impact on wages (Carter and Sutch 1999). Whatever the theoretical considerations, however, immigration became an increasingly controversial political issue during the late nineteenth and early twentieth centuries. While employers and some immigrant groups supported continued immigration, there was a growing nativist sentiment among other segments of the population. Anti-immigrant sentiments appear to have arisen out of a mix of perceived economic effects and concern about the implications of the ethnic, religious and cultural differences between immigrants and the native born.

In 1882, Congress passed the Chinese Exclusion Act. Subsequent legislative efforts to impose further restrictions on immigration passed Congress but foundered on presidential vetoes. The balance of political forces shifted, however, in the wake of World War I. In 1917 a literacy requirement was imposed for the first time, and in 1921 an Emergency Quota Act was passed (Goldin 1994).

With the passage of the Emergency Quota Act in 1921 and subsequent legislation culminating in the National Origins Act, the volume of immigration dropped sharply. Since this time international migration into the United States has been controlled to varying degrees by legal restrictions. Variations in the rules have produced variations in the volume of legal immigration. Meanwhile the persistence of large wage gaps between the United States and Mexico and other developing countries has encouraged a substantial volume of illegal immigration. It remains the case, however, that most of this migration—both legal and illegal—continues to be directed by chains of friends and relatives.

Recent trends in outsourcing and off-shoring have begun to create a new channel by which lower-wage workers outside the United States can respond to the country’s high wages without physically relocating. Workers in India, China, and elsewhere possessing technical skills can now provide services such as data entry or technical support by phone and over the internet. While the novelty of this phenomenon has attracted considerable attention, the actual volume of jobs moved off-shore remains limited, and there are important obstacles to overcome before more jobs can be carried out remotely (Edwards 2004).

Internal Migration in the Nineteenth and Twentieth Centuries

At the same time that American economic development created international imbalances between labor supply and demand it also created internal disequilibrium. Fertile land and abundant natural resources drew population toward less densely settled regions in the West. Over the course of the century, advances in transportation technologies lowered the cost of shipping goods from interior regions, vastly expanding the area available for settlement. Meanwhile transportation advances and technological innovations encouraged the growth of manufacturing and fueled increased urbanization. The movement of population and economic activity from the Eastern Seaboard into the interior of the continent and from rural to urban areas in response to these incentives is an important element of U.S. economic history in the nineteenth century.

In the pre-Civil War era, the labor market response to frontier expansion differed substantially between North and South, with profound effects on patterns of settlement and regional development. Much of the cost of migration is a result of the need to gather information about opportunities in potential destinations. In the South, plantation owners could spread these costs over a relatively large number of potential migrants—i.e., their slaves. Plantations were also relatively self-sufficient, requiring little urban or commercial infrastructure to make them economically viable. Moreover, the existence of well-established markets for slaves allowed western planters to expand their labor force by purchasing additional labor from eastern plantations.

In the North, on the other hand, migration took place through the relocation of small, family farms. Fixed costs of gathering information and the risks of migration loomed larger in these farmers’ calculations than they did for slaveholders, and they were more dependent on the presence of urban merchants to supply them with inputs and market their products. Consequently the task of mobilizing labor fell to promoters who bought up large tracts of land at low prices and then subdivided them into individual lots. To increase the value of these lands promoters offered loans, actively encourage the development of urban services such as blacksmith shops, grain merchants, wagon builders and general stores, and recruited settlers. With the spread of railroads, railroad construction companies also played a role in encouraging settlement along their routes to speed the development of traffic.

The differences in processes of westward migration in the North and South were reflected in the divergence of rates of urbanization, transportation infrastructure investment, manufacturing employment, and population density, all of which were higher in the North than in the South in 1860 (Wright 1986, pp. 19-29).

The Distribution of Labor among Economic Activities

Over the course of U.S. economic development technological changes and shifting consumption patterns have caused the demand for labor to increase in manufacturing and services and decline in agriculture and other extractive activities. These broad changes are illustrated in Table 2. As technological changes have increased the advantages of specialization and the division of labor, more and more economic activity has moved outside the scope of the household, and the boundaries of the labor market have been enlarged. As a result more and more women have moved into the paid labor force. On the other hand, with the increasing importance of formal education, there has been a decline in the number of children in the labor force (Whaples 2005).

Table 2

Sectoral Distribution of the Labor Force, 1800-1999

Share in

Non-Agriculture

Year

Total Labor Force (1000s)

Agriculture

Total

Manufacturing

Services

1800

1,658

76.2

23.8

1850

8,199

53.6

46.4

1900

29,031

37.5

59.4

35.8

23.6

1950

57,860

11.9

88.1

41.0

47.1

1999

133,489

2.3

97.7

24.7

73.0

Notes and Sources: 1800 and 1850 from Weiss (1986), pp. 646-49; remaining years from Hughes and Cain (2003), 547-48. For 1900-1999 Forestry and Fishing are included in the Agricultural labor force.

As these changes have taken place they have placed strains on existing labor market institutions and encouraged the development of new mechanisms to facilitate the distribution of labor. Over the course of the last century and a half the tendency has been a movement away from something approximating a “spot” market characterized by short-term employment relationships in which wages are equated to the marginal product of labor, and toward a much more complex and rule-bound set of long-term transactions (Goldin 2000, p. 586) While certain segments of the labor market still involve relatively anonymous and short-lived transactions, workers and employers are much more likely today to enter into long-term employment relationships that are expected to last for many years.

The evolution of labor market institutions in response to these shifting demands has been anything but smooth. During the late nineteenth century the expansion of organized labor was accompanied by often violent labor-management conflict (Friedman 2002). Not until the New Deal did unions gain widespread acceptance and a legal right to bargain. Yet even today, union organizing efforts are often met with considerable hostility.

Conflicts over union organizing efforts inevitably involved state and federal governments because the legal environment directly affected the bargaining power of both sides, and shifting legal opinions and legislative changes played an important part in determining the outcome of these contests. State and federal governments were also drawn into labor markets as various groups sought to limit hours of work, set minimum wages, provide support for disabled workers, and respond to other perceived shortcomings of existing arrangements. It would be wrong, however, to see the growth of government regulation as simply a movement from freer to more regulated markets. The ability to exchange goods and services rests ultimately on the legal system, and to this extent there has never been an entirely unregulated market. In addition, labor market transactions are never as simple as the anonymous exchange of other goods or services. Because the identities of individual buyers and sellers matter and the long-term nature of many employment relationships, adjustments can occur along other margins besides wages, and many of these dimensions involve externalities that affect all workers at a particular establishment, or possibly workers in an entire industry or sector.

Government regulations have responded in many cases to needs voiced by participants on both sides of the labor market for assistance to achieve desired ends. That has not, of course, prevented both workers and employers from seeking to use government to alter the way in which the gains from trade are distributed within the market.

The Agricultural Labor Market

At the beginning of the nineteenth century most labor was employed in agriculture, and, with the exception of large slave plantations, most agricultural labor was performed on small, family-run farms. There were markets for temporary and seasonal agricultural laborers to supplement family labor supply, but in most parts of the country outside the South, families remained the dominant institution directing the allocation of farm labor. Reliable estimates of the number of farm workers are not readily available before 1860, when the federal Census first enumerated “farm laborers.” At this time census enumerators found about 800 thousand such workers, implying an average of less than one-half farm worker per farm. Interpretation of this figure is complicated, however, and it may either overstate the amount of hired help—since farm laborers included unpaid family workers—or understate it—since it excluded those who reported their occupation simply as “laborer” and may have spent some of their time working in agriculture (Wright 1988, p. 193). A possibly more reliable indicator is provided by the percentage of gross value of farm output spent on wage labor. This figure fell from 11.4 percent in 1870 to around 8 percent by 1900, indicating that hired labor was on average becoming even less important (Wright 1988, pp. 194-95).

In the South, after the Civil War, arrangements were more complicated. Former plantation owners continued to own large tracts of land that required labor if they were to be made productive. Meanwhile former slaves needed access to land and capital if they were to support themselves. While some land owners turned to wage labor to work their land, most relied heavily on institutions like sharecropping. On the supply side, croppers viewed this form of employment as a rung on the “agricultural ladder” that would lead eventually to tenancy and possibly ownership. Because climbing the agricultural ladder meant establishing one’s credit-worthiness with local lenders, southern farm laborers tended to sort themselves into two categories: locally established (mostly older, married men) croppers and renters on the one hand, and mobile wage laborers (mostly younger and unmarried) on the other. While the labor market for each of these types of workers appears to have been relatively competitive, the barriers between the two markets remained relatively high (Wright 1987, p. 111).

While the predominant pattern in agriculture then was one of small, family-operated units, there was an important countervailing trend toward specialization that both depended on, and encouraged the emergence of a more specialized market for farm labor. Because specialization in a single crop increased the seasonality of labor demand, farmers could not afford to employ labor year-round, but had to depend on migrant workers. The use of seasonal gangs of migrant wage laborers developed earliest in California in the 1870s and 1880s, where employers relied heavily on Chinese immigrants. Following restrictions on Chinese entry, they were replaced first by Japanese, and later by Mexican workers (Wright 1988, pp. 201-204).

The Emergence of Internal Labor Markets

Outside of agriculture, at the beginning of the nineteenth century most manufacturing took place in small establishments. Hired labor might consist of a small number of apprentices, or, as in the early New England textile mills, a few child laborers hired from nearby farms (Ware 1931). As a result labor market institutions remained small-scale and informal, and institutions for training and skill acquisition remained correspondingly limited. Workers learned on the job as apprentices or helpers; advancement came through establishing themselves as independent producers rather than through internal promotion.

With the growth of manufacturing, and the spread of factory methods of production, especially in the years after the end of the Civil War, an increasing number of people could expect to spend their working-lives as employees. One reflection of this change was the emergence in the 1870s of the problem of unemployment. During the depression of 1873 for the first time cities throughout the country had to contend with large masses of industrial workers thrown out of work and unable to support themselves through, in the language of the time, “no fault of their own” (Keyssar 1986, ch. 2).

The growth of large factories and the creation of new kinds of labor skills specific to a particular employer created returns to sustaining long-term employment relationships. As workers acquired job- and employer-specific skills their productivity increased giving rise to gains that were available only so long as the employment relationship persisted. Employers did little, however, to encourage long-term employment relationships. Instead authority over hiring, promotion and retention was commonly delegated to foremen or inside contractors (Nelson 1975, pp. 34-54). In the latter case, skilled craftsmen operated in effect as their own bosses contracting with the firm to supply components or finished products for an agreed price, and taking responsibility for hiring and managing their own assistants.

These arrangements were well suited to promoting external mobility. Foremen were often drawn from the immigrant community and could easily tap into word-of-mouth channels of recruitment. But these benefits came increasingly into conflict with rising costs of hiring and training workers.

The informality of personnel policies prior to World War I seems likely to have discouraged lasting employment relationships, and it is true that rates of labor turnover at the beginning of the twentieth century were considerably higher than they were to be later (Owen, 2004). Scattered evidence on the duration of employment relationships gathered by various state labor bureaus at the end of the century suggests, however, at least some workers did establish lasting employment relationship (Carter 1988; Carter and Savocca 1990; Jacoby and Sharma 1992; James 1994).

The growing awareness of the costs of labor-turnover and informal, casual labor relations led reformers to advocate the establishment of more centralized and formal processes of hiring, firing and promotion, along with the establishment of internal job-ladders, and deferred payment plans to help bind workers and employers. The implementation of these reforms did not make significant headway, however, until the 1920s (Slichter 1929). Why employers began to establish internal labor markets in the 1920s remains in dispute. While some scholars emphasize pressure from workers (Jacoby 1984; 1985) others have stressed that it was largely a response to the rising costs of labor turnover (Edwards 1979).

The Government and the Labor Market

The growth of large factories contributed to rising labor tensions in the late nineteenth- and early twentieth-centuries. Issues like hours of work, safety, and working conditions all have a significant public goods aspect. While market forces of entry and exit will force employers to adopt policies that are sufficient to attract the marginal worker (the one just indifferent between staying and leaving), less mobile workers may find that their interests are not adequately represented (Freeman and Medoff 1984). One solution is to establish mechanisms for collective bargaining, and the years after the American Civil War were characterized by significant progress in the growth of organized labor (Friedman 2002). Unionization efforts, however, met strong opposition from employers, and suffered from the obstacles created by the American legal system’s bias toward protecting property and the freedom of contract. Under prevailing legal interpretation, strikes were often found by the courts to be conspiracies in restraint of trade with the result that the apparatus of government was often arrayed against labor.

Although efforts to win significant improvements in working conditions were rarely successful, there were still areas where there was room for mutually beneficial change. One such area involved the provision of disability insurance for workers injured on the job. Traditionally, injured workers had turned to the courts to adjudicate liability for industrial accidents. Legal proceedings were costly and their outcome unpredictable. By the early 1910s it became clear to all sides that a system of disability insurance was preferable to reliance on the courts. Resolution of this problem, however, required the intervention of state legislatures to establish mandatory state workers compensation insurance schemes and remove the issue from the courts. Once introduced workers compensation schemes spread quickly: nine states passed legislation in 1911; 13 more had joined the bandwagon by 1913, and by 1920 44 states had such legislation (Fishback 2001).

Along with workers compensation state legislatures in the late nineteenth century also considered legislation restricting hours of work. Prevailing legal interpretations limited the effectiveness of such efforts for adult males. But rules restricting hours for women and children were found to be acceptable. The federal government passed legislation restricting the employment of children under 14 in 1916, but this law was found unconstitutional in 1916 (Goldin 2000, p. 612-13).

The economic crisis of the 1930s triggered a new wave of government interventions in the labor market. During the 1930s the federal government granted unions the right to organize legally, established a system of unemployment, disability and old age insurance, and established minimum wage and overtime pay provisions.

In 1933 the National Industrial Recovery Act included provisions legalizing unions’ right to bargain collectively. Although the NIRA was eventually ruled to be unconstitutional, the key labor provisions of the Act were reinstated in the Wagner Act of 1935. While some of the provisions of the Wagner Act were modified in 1947 by the Taft-Hartley Act, its passage marks the beginning of the golden age of organized labor. Union membership jumped very quickly after 1935 from around 12 percent of the non-agricultural labor force to nearly 30 percent, and by the late 1940s had attained a peak of 35 percent, where it stabilized. Since the 1960s, however, union membership has declined steadily, to the point where it is now back at pre-Wagner Act levels.

The Social Security Act of 1935 introduced a federal unemployment insurance scheme that was operated in partnership with state governments and financed through a tax on employers. It also created government old age and disability insurance. In 1938, the federal Fair Labor Standards Act provided for minimum wages and for overtime pay. At first the coverage of these provisions was limited, but it has been steadily increased in subsequent years to cover most industries today.

In the post-war era, the federal government has expanded its role in managing labor markets both directly—through the establishment of occupational safety regulations, and anti-discrimination laws, for example—and indirectly—through its efforts to manage the macroeconomy to insure maximum employment.

A further expansion of federal involvement in labor markets began in 1964 with passage of the Civil Rights Act, which prohibited employment discrimination against both minorities and women. In 1967 the Age Discrimination and Employment Act was passed prohibiting discrimination against people aged 40 to 70 in regard to hiring, firing, working conditions and pay. The Family and Medical Leave Act of 1994 allows for unpaid leave to care for infants, children and other sick relatives (Goldin 2000, p. 614).

Whether state and federal legislation has significantly affected labor market outcomes remains unclear. Most economists would argue that the majority of labor’s gains in the past century would have occurred even in the absence of government intervention. Rather than shaping market outcomes, many legislative initiatives emerged as a result of underlying changes that were making advances possible. According to Claudia Goldin (2000, p. 553) “government intervention often reinforced existing trends, as in the decline of child labor, the narrowing of the wage structure, and the decrease in hours of work.” In other cases, such as Workers Compensation and pensions, legislation helped to establish the basis for markets.

The Changing Boundaries of the Labor Market

The rise of factories and urban employment had implications that went far beyond the labor market itself. On farms women and children had found ready employment (Craig 1993, ch. 4). But when the male household head worked for wages, employment opportunities for other family members were more limited. Late nineteenth-century convention largely dictated that married women did not work outside the home unless their husband was dead or incapacitated (Goldin 1990, p. 119-20). Children, on the other hand, were often viewed as supplementary earners in blue-collar households at this time.

Since 1900 changes in relative earnings power related to shifts in technology have encouraged women to enter the paid labor market while purchasing more of the goods and services that were previously produced within the home. At the same time, the rising value of formal education has lead to the withdrawal of child labor from the market and increased investment in formal education (Whaples 2005). During the first half of the twentieth century high school education became nearly universal. And since World War II, there has been a rapid increase in the number of college educated workers in the U.S. economy (Goldin 2000, p. 609-12).

Assessing the Efficiency of Labor Market Institutions

The function of labor markets is to match workers and jobs. As this essay has described the mechanisms by which labor markets have accomplished this task have changed considerably as the American economy has developed. A central issue for economic historians is to assess how changing labor market institutions have affected the efficiency of labor markets. This leads to three sets of questions. The first concerns the long-run efficiency of market processes in allocating labor across space and economic activities. The second involves the response of labor markets to short-run macroeconomic fluctuations. The third deals with wage determination and the distribution of income.

Long-Run Efficiency and Wage Gaps

Efforts to evaluate the efficiency of market allocation begin with what is commonly know as the “law of one price,” which states that within an efficient market the wage of similar workers doing similar work under similar circumstances should be equalized. The ideal of complete equalization is, of course, unlikely to be achieved given the high information and transactions costs that characterize labor markets. Thus, conclusions are usually couched in relative terms, comparing the efficiency of one market at one point in time with those of some other markets at other points in time. A further complication in measuring wage equalization is the need to compare homogeneous workers and to control for other differences (such as cost of living and non-pecuniary amenities).

Falling transportation and communications costs have encouraged a trend toward diminishing wage gaps over time, but this trend has not always been consistent over time, nor has it applied to all markets in equal measure. That said, what stands out is in fact the relative strength of forces of market arbitrage that have operated in many contexts to promote wage convergence.

At the beginning of the nineteenth century, the costs of trans-Atlantic migration were still quite high and international wage gaps large. By the 1840s, however, vast improvements in shipping cut the costs of migration, and gave rise to an era of dramatic international wage equalization (O’Rourke and Williamson 1999, ch. 2; Williamson 1995). Figure 1 shows the movement of real wages relative to the United States in a selection of European countries. After the beginning of mass immigration wage differentials began to fall substantially in one country after another. International wage convergence continued up until the 1880s, when it appears that the accelerating growth of the American economy outstripped European labor supply responses and reversed wage convergence briefly. World War I and subsequent immigration restrictions caused a sharper break, and contributed to widening international wage differences during the middle portion of the twentieth century. From World War II until about 1980, European wage levels once again began to converge toward the U.S., but this convergence reflected largely internally-generated improvements in European living standards rather then labor market pressures.

Wage convergence also took place within some parts of the United States during the nineteenth century. Figure 2 traces wages in the North Central and Southern regions of the U.S relative to those in the Northeast across the period from 1820 to the early twentieth century. Within the United States, wages in the North Central region of the country were 30 to 40 percent higher than in the East in the 1820s (Margo 2000a, ch. 5). Thereafter, wage gaps declined substantially, falling to the 10-20 percent range before the Civil War. Despite some temporary divergence during the war, wage gaps had fallen to 5 to 10 percent by the 1880s and 1890s. Much of this decline was made possible by faster and less expensive means of transportation, but it was also dependent on the development of labor market institutions linking the two regions, for while transportation improvements helped to link East and West, there was no corresponding North-South integration. While southern wages hovered near levels in the Northeast prior to the Civil War, they fell substantially below northern levels after the Civil War, as Figure 2 illustrates.

Figure 2

Relative Regional Real Wage Rates in the United States, 1825-1984

(Northeast = 100 in each year)

Notes and sources: Rosenbloom (2002, p. 133); Montgomery (1992). It is not possible to assemble entirely consistent data on regional wage variations over such an extended period. The nature of the wage data, the precise geographic coverage of the data, and the estimates of regional cost-of-living indices are all different. The earliest wage data—Margo (2000); Sundstrom and Rosenbloom (1993) and Coelho and Shepherd (1976) are all based on occupational wage rates from payroll records for specific occupations; Rosenbloom (1996) uses average earnings across all manufacturing workers; while Montgomery (1992) uses individual level wage data drawn from the Current Population Survey, and calculates geographic variations using a regression technique to control for individual differences in human capital and industry of employment. I used the relative real wages that Montgomery (1992) reported for workers in manufacturing, and used an unweighted average of wages across the cities in each region to arrive at relative regional real wages. Interested readers should consult the various underlying sources for further details.

Despite the large North-South wage gap Table 3 shows there was relatively little migration out of the South until large-scale foreign immigration came to an end. Migration from the South during World War I and the 1920s created a basis for future chain migration, but the Great Depression of the 1930s interrupted this process of adjustment. Not until the 1940s did the North-South wage gap begin to decline substantially (Wright 1986, pp. 71-80). By the 1970s the southern wage disadvantage had largely disappeared, and because of the decline fortunes of older manufacturing districts and the rise of Sunbelt cities, wages in the South now exceed those in the Northeast (Coelho and Ghali 1971; Bellante 1979; Sahling and Smith 1983; Montgomery 1992). Despite these shocks, however, the overall variation in wages appears comparable to levels attained by the end of the nineteenth century. Montgomery (1992), for example finds that from 1974 to 1984 the standard deviation of wages across SMSAs was only about 10 percent of the average wage.

Table 3

Net Migration by Region, and Race, 1870-1950

South

Northeast

North Central

West

Period

White

Black

White

Black

White

Black

White

Black

Number (in 1,000s)

1870-80

91

-68

-374

26

26

42

257

0

1880-90

-271

-88

-240

61

-43

28

554

0

1890-00

-30

-185

101

136

-445

49

374

0

1900-10

-69

-194

-196

109

-1,110

63

1,375

22

1910-20

-663

-555

-74

242

-145

281

880

32

1920-30

-704

-903

-177

435

-464

426

1,345

42

1930-40

-558

-480

55

273

-747

152

1,250

55

1940-50

-866

-1581

-659

599

-1,296

626

2,822

356

Rate (migrants/1,000 Population)

1870-80

11

-14

-33

55

2

124

274

0

1880-90

-26

-15

-18

107

-3

65

325

0

1890-00

-2

-26

6

200

-23

104

141

0

1900-10

-4

-24

-11

137

-48

122

329

542

1910-20

-33

-66

-3

254

-5

421

143

491

1920-30

-30

-103

-7

328

-15

415

160

421

1930-40

-20

-52

2

157

-22

113

116

378

1940-50

-28

-167

-20

259

-35

344

195

964

Note: Net migration is calculated as the difference between the actual increase in population over each decade and the predicted increase based on age and sex specific mortality rates and the demographic structure of the region’s population at the beginning of the decade. If the actual increase exceeds the predicted increase this implies a net migration into the region; if the actual increase is less than predicted this implies net migration out of the region. The states included in the Southern region are Oklahoma, Texas, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida.

Source: Eldridge and Thomas (1964, pp. 90, 99).

In addition to geographic wage gaps economists have considered gaps between farm and city, between black and white workers, between men and women, and between different industries. The literature on these topics is quite extensive and this essay can only touch on a few of the more general themes raised here as they relate to U.S. economic history.

Studies of farm-city wage gaps are a variant of the broader literature on geographic wage variation, related to the general movement of labor from farms to urban manufacturing and services. Here comparisons are complicated by the need to adjust for the non-wage perquisites that farm laborers typically received, which could be almost as large as cash wages. The issue of whether such gaps existed in the nineteenth century has important implications for whether the pace of industrialization was impeded by the lack of adequate labor supply responses. By the second half of the nineteenth century at least, it appears that farm-manufacturing wage gaps were small and markets were relatively integrated (Wright 1988, pp. 204-5). Margo (2000, ch. 4) offers evidence of a high degree of equalization within local labor markets between farm and urban wages as early as 1860. Making comparisons within counties and states, he reports that farm wages were within 10 percent of urban wages in eight states. Analyzing data from the late nineteenth century through the 1930s, Hatton and Williamson (1991) find that farm and city wages were nearly equal within U.S. regions by the 1890s. It appears, however that during the Great Depression farm wages were much more flexible than urban wages causing a large gap to emerge at this time (Alston and Williamson 1991).

Much attention has been focused on trends in wage gaps by race and sex. The twentieth century has seen a substantial convergence in both of these differentials. Table 4 displays comparisons of earnings of black males relative to white males for full time workers. In 1940, full-time black male workers earned only about 43 percent of what white male full-time workers did. By 1980 the racial pay ratio had risen to nearly 73 percent, but there has been little subsequent progress. Until the mid-1960s these gains can be attributed primarily to migration from the low-wage South to higher paying areas in the North, and to increases in the quantity and quality of black education over time (Margo 1995; Smith and Welch 1990). Since then, however, most gains have been due to shifts in relative pay within regions. Although it is clear that discrimination was a key factor in limiting access to education, the role of discrimination within the labor market in contributing to these differentials has been a more controversial topic (see Wright 1986, pp. 127-34). But the episodic nature of black wage gains, especially after 1964 is compelling evidence that discrimination has played a role historically in earnings differences and that federal anti-discrimination legislation was a crucial factor in reducing its effects (Donohue and Heckman 1991).

Table 4

Black Male Wages as a Percentage of White Male Wages, 1940-2004

Date

Black Relative Wage

1940

43.4

1950

55.2

1960

57.5

1970

64.4

1980

72.6

1990

70.0

2004

77.0

Notes and Sources: Data for 1940 through 1980 are based on Census data as reported in Smith and Welch (1989, Table 8). Data for 1990 are from Ehrenberg and Smith (2000, Table 12.4) and refer to earnings of full time, full year workers. Data from 2004 are for median weekly earnings of full-time wage and salary workers derived from data in the Current Population Survey accessed on-line from the Bureau of Labor Statistic on 13 December 2005; URL ftp://ftp.bls.gov/pub/special.requests/lf/aat37.txt.

Male-Female wage gaps have also narrowed substantially over time. In the 1820s women’s earnings in manufacturing were a little less than 40 percent of those of men, but this ratio rose over time reaching about 55 percent by the 1920s. Across all sectors women’s relative pay rose during the first half of the twentieth century, but gains in female wages stalled during the 1950s and 1960s at the time when female labor force participation began to increase rapidly. Beginning in the late 1970s or early 1980s, relative female pay began to rise again, and today women earn about 80 percent what men do (Goldin 1990, table 3.2; Goldin 2000, pp. 606-8). Part of this remaining difference is explained by differences in the occupational distribution of men and women, with women tending to be concentrated in lower paying jobs. Whether these differences are the result of persistent discrimination or arise because of differences in productivity or a choice by women to trade off greater flexibility in terms of labor market commitment for lower pay remains controversial.

In addition to locational, sectoral, racial and gender wage differentials, economists have also documented and analyzed differences by industry. Krueger and Summers (1987) find that there are pronounced differences in wages by industry within well-specified occupational classes, and that these differentials have remained relatively stable over several decades. One interpretation of this phenomenon is that in industries with substantial market power workers are able to extract some of the monopoly rents as higher pay. An alternative view is that workers are in fact heterogeneous, and differences in wages reflect a process of sorting in which higher paying industries attract more able workers.

The Response to Short-run Macroeconomic Fluctuations

The existence of unemployment is one of the clearest indications of the persistent frictions that characterize labor markets. As described earlier, the concept of unemployment first entered common discussion with the growth of the factory labor force in the 1870s. Unemployment was not a visible social phenomenon in an agricultural economy, although there was undoubtedly a great deal of hidden underemployment.

Although one might have expected that the shift from spot toward more contractual labor markets would have increased rigidities in the employment relationship that would result in higher levels of unemployment there is in fact no evidence of any long-run increase in the level of unemployment.

Contemporaneous measurements of the rate of unemployment only began in 1940. Prior to this date, economic historians have had to estimate unemployment levels from a variety of other sources. Decennial censuses provide benchmark levels, but it is necessary to interpolate between these benchmarks based on other series. Conclusions about long-run changes in unemployment behavior depend to a large extent on the method used to interpolate between benchmark dates. Estimates prepared by Stanley Lebergott (1964) suggest that the average level of unemployment and its volatility have declined between the pre-1930 and post-World War II periods. Christina Romer (1986a, 1986b), however, has argued that there was no decline in volatility. Rather, she argues that the apparent change in behavior is the result of Lebergott’s interpolation procedure.

While the aggregate behavior of unemployment has changed surprisingly little over the past century, the changing nature of employment relationships has been reflected much more clearly in changes in the distribution of the burden of unemployment (Goldin 2000, pp. 591-97). At the beginning of the twentieth century, unemployment was relatively widespread, and largely unrelated to personal characteristics. Thus many employees faced great uncertainty about the permanence of their employment relationship. Today, on the other hand, unemployment is highly concentrated: falling heavily on the least skilled, the youngest, and the non-white segments of the labor force. Thus, the movement away from spot markets has tended to create a two-tier labor market in which some workers are highly vulnerable to economic fluctuations, while others remain largely insulated from economic shocks.

Wage Determination and Distributional Issues

American economic growth has generated vast increases in the material standard of living. Real gross domestic product per capita, for example, has increased more than twenty-fold since 1820 (Steckel 2002). This growth in total output has in large part been passed on to labor in the form of higher wages. Although labor’s share of national output has fluctuated somewhat, in the long-run it has remained surprisingly stable. According to Abramovitz and David (2000, p. 20), labor received 65 percent of national income in the years 1800-1855. Labor’s share dropped in the late nineteenth and early twentieth centuries, falling to a low of 54 percent of national income between 1890 and 1927, but has since risen, reaching 65 percent again in 1966-1989. Thus, over the long term, labor income has grown at the same rate as total output in the economy.

The distribution of labor’s gains across different groups in the labor force has also varied over time. I have already discussed patterns of wage variation by race and gender, but another important issue revolves around the overall level of inequality of pay, and differences in pay between groups of skilled and unskilled workers. Careful research by Picketty and Saez (2003) using individual income tax returns has documented changes in the overall distribution of income in the United States since 1913. They find that inequality has followed a U-shaped pattern over the course of the twentieth century. Inequality was relatively high at the beginning of the period they consider, fell sharply during World War II, held steady until the early 1970s and then began to increase, reaching levels comparable to those in the early twentieth century by the 1990s.

An important factor in the rising inequality of income since 1970 has been growing dispersion in wage rates. The wage differential between workers in the 90th percentile of the wage distribution and those in the 10th percentile increased by 49 percent between 1969 and 1995 (Plotnick et al 2000, pp. 357-58). These shifts are mirrored in increased premiums earned by college graduates relative to high school graduates. Two primary explanations have been advanced for these trends. First, there is evidence that technological changes—especially those associated with the increased use of information technology—has increased relative demand for more educated workers (Murnane, Willett and Levy (1995). Second, increased global integration has allowed low-wage manufacturing industries overseas to compete more effectively with U.S. manufacturers, thus depressing wages in what have traditionally been high-paying blue collar jobs.

Efforts to expand the scope of analysis over a longer-run encounter problems with more limited data. Based on selected wage ratios of skilled and unskilled workers Willamson and Lindert (1980) have argued that there was an increase in wage inequality over the course of the nineteenth century. But other scholars have argued that the wage series that Williamson and Lindert used are unreliable (Margo 2000b, pp. 224-28).

Conclusions

The history of labor market institutions in the United States illustrates the point that real world economies are substantially more complex than the simplest textbook models. Instead of a disinterested and omniscient auctioneer, the process of matching buyers and sellers takes place through the actions of self-interested market participants. The resulting labor market institutions do not respond immediately and precisely to shifting patterns of incentives. Rather they are subject to historical forces of increasing-returns and lock-in that cause them to change gradually and along path-dependent trajectories.

For all of these departures from the theoretically ideal market, however, the history of labor markets in the United States can also be seen as a confirmation of the remarkable power of market processes of allocation. From the beginning of European settlement in mainland North America, labor markets have done a remarkable job of responding to shifting patterns of demand and supply. Not only have they accomplished the massive geographic shifts associated with the settlement of the United States, but they have also dealt with huge structural changes induced by the sustained pace of technological change.

References

Abramovitz, Moses and Paul A. David. “American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long-Run Perspective.” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. New York: Cambridge University Press, 2000.

Carter, Susan B. and Richard Sutch. “Historical Perspectives on the Economic Consequences of Immigration into the United States.” In The Handbook of International Migration: The American Experience, edited by Charles Hirschman, Philip Kasinitz and Josh DeWind. New York: Russell Sage Foundation, 1999.

Dunn, Richard S. “Servants and Slaves: The Recruitment and Employment of Labor.” In Colonial British America: Essays in the New History of the Early Modern Era, edited by Jack P. Greene and J.R. Pole. Baltimore: Johns Hopkins University Press, 1984.

Edwards, B. “A World of Work: A Survey of Outsourcing.” Economist 13 November 2004.

Edwards, Richard. Contested Terrain: The Transformation of the Workplace in the Twentieth Century. New York: Basic Books, 1979.

Galenson, David W. “The Rise and Fall of Indentured Servitude in the Americas: An Economic Analysis.” Journal of Economic History 44, no. 1 (1984): 1-26.

Galloway, Lowell E., Richard K. Vedder and Vishwa Shukla. “The Distribution of the Immigrant Population in the United States: An Econometric Analysis.” Explorations in Economic History 11 (1974): 213-26.

Gjerde, John. From Peasants to Farmers: Migration from Balestrand, Norway to the Upper Middle West. New York: Cambridge University Press, 1985.

Goldin, Claudia. “The Political Economy of Immigration Restriction in the United States, 1890 to 1921.” In The Regulated Economy: A Historical Approach to Political Economy, edited by Claudia Goldin and Gary Libecap. Chicago: University of Chicago Press, 1994.

Goldin, Claudia. “Labor Markets in the Twentieth Century.” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. Cambridge: Cambridge University Press, 2000.

James, John A. “Job Tenure in the Gilded Age.” In Labour Market Evolution: The Economic History of Market Integration, Wage Flexibility, and the Employment Relation, edited by George Grantham and Mary MacKinnon. New York: Routledge, 1994.

Margo, Robert. Wages and Labor Markets in the United States, 1820-1860. Chicago: University of Chicago Press, 2000a.

Margo, Robert. “The Labor Force in the Nineteenth Century.” In The Cambridge Economic History of the United States, Volume 2: The Long Nineteenth Century, edited by Stanley L. Engerman and Robert E. Gallman, 207-44. New York: Cambridge University Press, 2000b.

McCusker, John J. and Russell R. Menard. The Economy of British America: 1607-1789. Chapel Hill: University of North Carolina Press, 1985.

Plotnick, Robert D. et al. “The Twentieth-Century Record of Inequality and Poverty in the United States” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. New York: Cambridge University Press, 2000.

Sundstrom, William A. and Joshua L. Rosenbloom. “Occupational Differences in the Dispersion of Wages and Working Hours: Labor Market Integration in the United States, 1890-1903.” Explorations in Economic History 30 (1993): 379-408.

Ward, David. Cities and Immigrants: A Geography of Change in Nineteenth-Century America. New York: Oxford University Press, 1971.

Weiss, Thomas. “Revised Estimates of the United States Workforce, 1800-1860.” In Long Term Factors in American Economic Growth, edited by Stanley L. Engerman and Robert E. Gallman, 641-78. Chicago: University of Chicago, 1986.

Luis Bértola, Universidad de la República — Uruguay

Uruguay’s Early History

Without silver or gold, without valuable species, scarcely peopled by gatherers and fishers, the Eastern Strand of the Uruguay River (Banda Oriental was the colonial name; República Oriental del Uruguay is the official name today) was, in the sixteenth and seventeenth centuries, distant and unattractive to the European nations that conquered the region. The major export product was the leather of wild descendants of cattle introduced in the early 1600s by the Spaniards. As cattle preceded humans, the state preceded society: Uruguay’s first settlement was Colonia del Sacramento, a Portuguese military fortress founded in 1680, placed precisely across from Buenos Aires, Argentina. Montevideo, also a fortress, was founded by the Spaniards in 1724. Uruguay was on the border between the Spanish and Portuguese empires, a feature which would be decisive for the creation, with strong British involvement, in 1828-1830, of an independent state.

Montevideo had the best natural harbor in the region, and rapidly became the end-point of the trans-Atlantic routes into the region, the base for a strong commercial elite, and for the Spanish navy in the region. During the first decades after independence, however, Uruguay was plagued by political instability, precarious institution building and economic retardation. Recurrent civil wars with intensive involvement by Britain, France, Portugal-Brazil and Argentina, made Uruguay a center for international conflicts, the most important being the Great War (Guerra Grande), which lasted from 1839 to 1851. At its end Uruguay had only about 130,000 inhabitants.

“Around the middle of the nineteenth century, Uruguay was dominated by the latifundium, with its ill-defined boundaries and enormous herds of native cattle, from which only the hides were exported to Great Britain and part of the meat, as jerky, to Brazil and Cuba. There was a shifting rural population that worked on the large estates and lived largely on the parts of beef carcasses that could not be marketed abroad. Often the landowners were also the caudillos of the Blanco or Colorado political parties, the protagonists of civil wars that a weak government was unable to prevent” (Barrán and Nahum, 1984, 655). This picture still holds, even if it has been excessively stylized, neglecting the importance of subsistence or domestic-market oriented peasant production.

Economic Performance in the Long Run

Despite its precarious beginnings, Uruguay’s per capita gross domestic product (GDP) growth from 1870 to 2002 shows an amazing persistence, with the long-run rate averaging around one percent per year. However, this apparent stability hides some important shifts. As shown in Figure 1, both GDP and population grew much faster before the 1930s; from 1930 to 1960 immigration vanished and population grew much more slowly, while decades of GDP stagnation and fast growth alternated; after the 1960s Uruguay became a net-emigration country, with low natural growth rates and a still spasmodic GDP growth.

GDP growth shows a pattern featured by Kuznets-like swings (Bértola and Lorenzo 2004), with extremely destructive downward phases, as shown in Table 1. This cyclical pattern is correlated with movements of the terms of trade (the relative price of exports versus imports), world demand and international capital flows. In the expansive phases exports performed well, due to increased demand and/or positive terms of trade shocks (1880s, 1900s, 1920s, 1940s and even during the Mercosur years from 1991 to 1998). Capital flows would sometimes follow these booms and prolong the cycle, or even be a decisive force to set the cycle up, as were financial flows in the 1970s and 1990s. The usual outcome, however, has been an overvalued currency, which blurred the debt problem and threatened the balance of trade by overpricing exports. Crises have been the result of a combination of changing trade conditions, devaluation and over-indebtedness, as in the 1880s, early 1910s, late 1920s, 1950s, early 1980s and late 1990s.

Table 1: Swings in the Uruguayan Economy, 1870-2003

Per capita GDP fall (%)

Length of recession (years)

Time to pre-crisis levels (years)

Time to next crisis (years)

1872-1875

26

3

15

16

1888-1890

21

2

19

25

1912-1915

30

3

15

19

1930-1933

36

3

17

24-27

1954/57-59

9

2-5

18-21

27-24

1981-1984

17

3

11

17

1998-2003

21

5

Sources: See Figure 1.

Besides its cyclical movement, the terms of trade showed a sharp positive trend in 1870-1913, a strongly fluctuating pattern around similar levels in 1913-1960 and a deteriorating trend since then. While the volume of exports grew quickly up to the 1920s, it stagnated in 1930-1960 and started to grow again after 1970. As a result, the purchasing power of exports grew fourfold in 1870-1913, fluctuated along with the terms of trade in 1930-1960, and exhibited a moderate growth in 1970-2002.

The Uruguayan economy was very open to trade in the period up to 1913, featuring high export shares, which naturally declined as the rapidly growing population filled in rather empty areas. In 1930-1960 the economy was increasingly and markedly closed to international trade, but since the 1970s the economy opened up to trade again. Nevertheless, exports, which earlier were mainly directed to Europe (beef, wool, leather, linseed, etc.), were increasingly oriented to Argentina and Brazil, in the context of bilateral trade agreements in the 1970s and 1980s and of Mercosur (the trading zone encompassing Argentina, Brazil, Paraguay and Uruguay) in the 1990s.

While industrial output kept pace with agrarian export-led growth during the first globalization boom before World War I, the industrial share in GDP increased in 1930-54, and was mainly domestic-market orientated. Deindustrialization has been profound since the mid-1980s. The service sector was always large: focusing on commerce, transport and traditional state bureaucracy during the first globalization boom; focusing on health care, education and social services, during the import-substituting industrialization (ISI) period in the middle of the twentieth century; and focusing on military expenditure, tourism and finance since the 1970s.

The income distribution changed markedly over time. During the first globalization boom before World War I, an already uneven distribution of income and wealth seems to have worsened, due to massive immigration and increasing demand for land, both rural and urban. However, by the 1920s the relative prices of land and labor changed their previous trend, reducing income inequality. The trend later favored industrialization policies, democratization, introduction of wage councils, and the expansion of the welfare state based on an egalitarian ideology. Inequality diminished in many respects: between sectors, within sectors, between genders and between workers and pensioners. While the military dictatorship and the liberal economic policy implemented since the 1970s initiated a drastic reversal of the trend toward economic equality, the globalizing movements of the 1980s and 1990s under democratic rule didn’t increase equality. Thus, inequality remains at the higher levels reached during the period of dictatorship (1973-85).

Comparative Long-run Performance

If the stable long-run rate of Uruguayan per capita GDP growth hides important internal transformations, Uruguay’s changing position in the international scene is even more remarkable. During the first globalization boom the world became more unequal: the United States forged ahead as the world leader (nearly followed by other settler economies); Asia and Africa lagged far behind. Latin America showed a confusing map, in which countries as Argentina and Uruguay performed rather well, and others, such as the Andean region, lagged far behind (Bértola and Williamson 2003). Uruguay’s strong initial position tended to deteriorate in relation to the successful core countries during the late 1800s, as shown in Figure 2. This trend of negative relative growth was somewhat weak during the first half of the twentieth century, improved significantly during the 1960s, as the import-substituting industrialization model got exhausted, and has continued since the 1970s, despite policies favoring increased integration into the global economy.

If school enrollment and literacy rates are reasonable proxies for human capital, in late 1800s both Argentina and Uruguay had a great handicap in relation to the United States, as shown in Table 2. The gap in literacy rates tended to disappear — as well as this proxy’s ability to measure comparative levels of human capital. Nevertheless, school enrollment, which includes college-level and technical education, showed a catching-up trend until the 1960’s, but reverted afterwards.

The gap in life-expectancy at birth has always been much smaller than the other development indicators. Nevertheless, some trends are noticeable: the gap increased in 1900-1930; decreased in 1930-1950; and increased again after the 1970s.

Uruguay during the First Globalization Boom: Challenge and Response

During the post-Great-War reconstruction after 1851, Uruguayan population grew rapidly (fueled by high natural rates and immigration) and so did per capita output. Productivity grew due to several causes including: the steam ship revolution, which critically reduced the price spread between Europe and America and eased access to the European market; railways, which contributed to the unification of domestic markets and reduced domestic transport costs; the diffusion and adaptation to domestic conditions of innovations in cattle-breeding and services; a significant reduction in transaction costs, related to a fluctuating but noticeable process of institutional building and strengthening of the coercive power of the state.

Wool and woolen products, hides and leather were exported mainly to Europe; salted beef (tasajo) to Brazil and Cuba. Livestock-breeding (both cattle and sheep) was intensive in natural resources and dominated by large estates. By the 1880s, the agrarian frontier was exhausted, land properties were fenced and property rights strengthened. Labor became abundant and concentrated in urban areas, especially around Montevideo’s harbor, which played an important role as a regional (supranational) commercial center. By 1908, it contained 40 percent of the nation’s population, which had risen to more than a million inhabitants, and provided the main part of Uruguay’s services, civil servants and the weak and handicraft-dominated manufacturing sector.

By the 1910s, Uruguayan competitiveness started to weaken. As the benefits of the old technological paradigm were eroding, the new one was not particularly beneficial for resource-intensive countries such as Uruguay. International demand shifted away from primary consumption, the population of Europe grew slowly and European countries struggled for self-sufficiency in primary production in a context of soaring world supply. Beginning in the 1920s, the cattle-breeding sector showed a very poor performance, due to lack of innovation away from natural pastures. In the 1930’s, its performance deteriorated mainly due to unfavorable international conditions. Export volumes stagnated until the 1970s, while purchasing power fluctuated strongly following the terms of trade.

Inward-looking Growth and Structural Change

The Uruguayan economy grew inwards until the 1950s. The multiple exchange rate system was the main economic policy tool. Agrarian production was re-oriented towards wool, crops, dairy products and other industrial inputs, away from beef. The manufacturing industry grew rapidly and diversified significantly, with the help of protectionist tariffs. It was light, and lacked capital goods or technology-intensive sectors. Productivity growth hinged upon technology transfers embodied in imported capital goods and an intensive domestic adaptation process of mature technologies. Domestic demand grew also through an expanding public sector and the expansion of a corporate welfare state. The terms of trade substantially impacted protectionism, productivity growth and domestic demand — the government raised money by manipulating exchange rates, so that when export prices rose the state had a greater capacity to protect the manufacturing sector through low exchange rates for capital goods, raw material and fuel imports and to spur productivity increases by imports of capital, while protection allowed industry to pay higher wages and thus expand domestic demand.

However, rent-seeking industries searching for protectionism and a weak clienteslist state, crowded by civil servants recruited in exchange for political favors to the political parties, directed structural change towards a closed economy and inefficient management. The obvious limits to inward looking growth of a country peopled by only about two million inhabitants were exacerbated in the late 1950s as terms of trade deteriorated. The clientelist political system, which was created by both traditional parties while the state was expanding at the national and local level, was now not able to absorb the increasing social conflicts, dyed by stringent ideological confrontation, in a context of stagnation and huge fiscal deficits.

Re-globalization and Regional Integration

The dictatorship (1973-1985) started a period of increasing openness to trade and deregulation which has persisted until the present. Dynamic integration into the world market is still incomplete, however. An attempt to return to cattle-breeding exports, as the engine of growth, was hindered by the oil crises and the ensuing European response, which restricted meat exports to that destination. The export sector was re-orientated towards “non-traditional exports” — i.e., exports of industrial goods made of traditional raw materials, to which low-quality and low-wage labor was added. Exports were also stimulated by means of strong fiscal exemptions and negative real interest rates and were re-orientated to the regional market (Argentina and Brazil) and to other developing regions. At the end of the 1970s, this policy was replaced by the monetarist approach to the balance of payments. The main goal was to defeat inflation (which had continued above 50% since the 1960s) through deregulation of foreign trade and a pre-announced exchange rate, the “tablita.” A strong wave of capital inflows led to a transitory success, but the Uruguayan peso became more and more overvalued, thus limiting exports, encouraging imports and deepening the chronic balance of trade deficit. The “tablita” remained dependent on increasing capital inflows and obviously collapsed when the risk of a huge devaluation became real. Recession and the debt crisis dominated the scene of the early 1980s.

Democratic regimes since 1985 have combined natural resource intensive exports to the region and other emergent markets, with a modest intra-industrial trade mainly with Argentina. In the 1990s, once again, Uruguay was overexposed to financial capital inflows which fueled a rather volatile growth period. However, by the year 2000, Uruguay had a much worse position in relation to the leaders of the world economy as measured by per capita GDP, real wages, equity and education coverage, than it had fifty years earlier.

Medium-run Prospects

In the 1990s Mercosur as a whole and each of its member countries exhibited a strong trade deficit with non-Mercosur countries. This was the result of a growth pattern fueled by and highly dependent on foreign capital inflows, combined with the traditional specialization in commodities. The whole Mercosur project is still mainly oriented toward price competitiveness. Nevertheless, the strongly divergent macroeconomic policies within Mercosur during the deep Argentine and Uruguayan crisis of the beginning of the twenty-first century, seem to have given place to increased coordination between Argentina and Brazil, thus making of the region a more stable environment.

The big question is whether the ongoing political revival of Mercosur will be able to achieve convergent macroeconomic policies, success in international trade negotiations, and, above all, achievements in developing productive networks which may allow Mercosur to compete outside its home market with knowledge-intensive goods and services. Over that hangs Uruguay’s chance to break away from its long-run divergent siesta.

References

Astorga, Pablo, Ame R. Bergés and Valpy FitzGerald. “The Standard of Living in Latin America during the Twentieth Century.” University of Oxford Discussion Papers in Economic and Social History 54 (2004).

Bértola, Luis. The Manufacturing Industry of Uruguay, 1913-1961: A Sectoral Approach to Growth, Fluctuations and Crisis. Publications of the Department of Economic History, University of Göteborg, 61; Institute of Latin American Studies of Stockholm University, Monograph No. 20, 1990.

Bértola, Luis and Fernando Lorenzo. “Witches in the South: Kuznets-like Swings in Argentina, Brazil and Uruguay since the 1870s.” In The Experience of Economic Growth, edited by J.L. van Zanden and S. Heikenen. Amsterdam: Aksant, 2004.

Daniel B. Klein, Santa Clara University and John Majewski, University of California – Santa Barbara 1

Private turnpikes were business corporations that built and maintained a road for the right to collect fees from travelers.2 Accounts of the nineteenth-century transportation revolution often treat turnpikes as merely a prelude to more important improvements such as canals and railroads. Turnpikes, however, left important social and political imprints on the communities that debated and supported them. Although turnpikes rarely paid dividends or other forms of direct profit, they nevertheless attracted enough capital to expand both the coverage and quality of the U. S. road system. Turnpikes demonstrated how nineteenth-century Americans integrated elements of the modern corporation – with its emphasis on profit-taking residual claimants – with non-pecuniary motivations such as use and esteem.

Private road building came and went in waves throughout the nineteenth century and across the country, with between 2,500 and 3,200 companies successfully financing, building, and operating their toll road. There were three especially important episodes of toll road construction: the turnpike era of the eastern states 1792 to 1845; the plank road boom 1847 to 1853; and the toll road of the far West 1850 to 1902.

The Turnpike Era, 1792–1845

Prior to the 1790s Americans had no direct experience with private turnpikes; roads were built, financed and managed mainly by town governments. Typically, townships compelled a road labor tax. The State of New York, for example, assessed eligible males a minimum of three days of roadwork under penalty of fine of one dollar. The labor requirement could be avoided if the worker paid a fee of 62.5 cents a day. As with public works of any kind, incentives were weak because the chain of activity could not be traced to a residual claimant – that is, private owners who claim the “residuals,” profit or loss. The laborers were brought together in a transitory, disconnected manner. Since overseers and laborers were commonly farmers, too often the crop schedule, rather than road deterioration, dictated the repairs schedule. Except in cases of special appropriations, financing came in dribbles deriving mostly from the fines and commutations of the assessed inhabitants. Commissioners could hardly lay plans for decisive improvements. When a needed connection passed through unsettled lands, it was especially difficult to mobilize labor because assessments could be worked out only in the district in which the laborer resided. Because work areas were divided into districts, as well as into towns, problems arose coordinating the various jurisdictions. Road conditions thus remained inadequate, as New York’s governors often acknowledged publicly (Klein and Majewski 1992, 472-75).

For Americans looking for better connections to markets, the poor state of the road system was a major problem. In 1790, a viable steamboat had not yet been built, canal construction was hard to finance and limited in scope, and the first American railroad would not be completed for another forty years. Better transportation meant, above all, better highways. State and local governments, however, had small bureaucracies and limited budgets which prevented a substantial public sector response. Turnpikes, in essence, were organizational innovations borne out of necessity – “the states admitted that they were unequal to the task and enlisted the aid of private enterprise” (Durrenberger 1931, 37).

America’s very limited and lackluster experience with the publicly operated toll roads of the 1780s hardly portended a future boom in private toll roads, but the success of private toll bridges may have inspired some future turnpike companies. From 1786 to 1798, fifty-nine private toll bridge companies were chartered in the northeast, beginning with Boston’s Charles River Bridge, which brought investors an average annual return of 10.5 percent in its first six years (Davis 1917, II, 188). Private toll bridges operated without many of the regulations that would hamper the private toll roads that soon followed, such as mandatory toll exemptions and conflicts over the location of toll gates. Also, toll bridges, by their very nature, faced little toll evasion, which was a serious problem for toll roads.

The more significant predecessor to America’s private toll road movement was Britain’s success with private toll roads. Beginning in 1663 and peaking from 1750 to 1772, Britain experienced a private turnpike movement large enough to acquire the nickname “turnpike mania” (Pawson 1977, 151). Although the British movement inspired the future American turnpike movement, the institutional differences between the two were substantial. Most important, perhaps, was the difference in their organizational forms. British turnpikes were incorporated as trusts – non-profit organizations financed by bonds – while American turnpikes were stock-financed corporations seemingly organized to pay dividends, though acting within narrow limits determined by the charter. Contrary to modern sensibilities, this difference made the British trusts, which operated under the firm expectation of fulfilling bond obligations, more intent and more successful in garnering residuals. In contrast, for the American turnpikes the hope of dividends was merely a faint hope, and never a legal obligation. Odd as it sounds, the stock-financed “business” corporation was better suited to operating the project as a civic enterprise, paying out returns in use and esteem rather than cash.

The first private turnpike in the United States was chartered by Pennsylvania in 1792 and opened two years later. Spanning 62 miles between Philadelphia and Lancaster, it quickly attracted the attention of merchants in other states, who recognized its potential to direct commerce away from their regions. Soon lawmakers from those states began chartering turnpikes. By 1800, 69 turnpike companies had been chartered throughout the country, especially in Connecticut (23) and New York (13). Over the next decade nearly six times as many turnpikes were incorporated (398). Table 1 shows that in the mid-Atlantic and New England states between 1800 and 1830, turnpike companies accounted for 27 percent of all business incorporations.

Table 1: Turnpikes as a Percentage of All Business Incorporations,
by Special and General Acts, 1800-1830

As shown in Table 2, a wider set of states had incorporated 1562 turnpikes by the end of 1845. Somewhere between 50 to 70 percent of these succeeded in building and operating toll roads. A variety of regulatory and economic conditions – outlined below – account for why a relatively low percentage of chartered turnpikes became going concerns. In New York, for example, tolls could be collected only after turnpikes passed inspections, which were typically conducted after ten miles of roadway had been built. Only 35 to 40 percent of New York turnpike projects – or about 165 companies – reached operational status. In Connecticut, by contrast, where settlement covered the state and turnpikes more often took over existing roadbeds, construction costs were much lower and about 87 percent of the companies reached operation (Taylor 1934, 210).

Table 2: Turnpike Incorporation, 1792-1845

State

1792-1800

1801-10

1811-20

1821-30

1831-40

1841-45

Total

NH

4

45

5

1

4

0

59

VT

9

19

15

7

4

3

57

MA

9

80

8

16

1

1

115

RI

3

13

8

13

3

1

41

CT

23

37

16

24

13

0

113

NY

13

126

133

75

83

27

457

PA

5

39

101

59

101

37

342

NJ

0

22

22

3

3

0

50

VA

0

6

7

8

25

0

46

MD

3

9

33

12

14

7

78

OH

0

2

14

12

114

62

204

Total

69

398

362

230

365

138

1562

Source: Klein and Fielding 1992: 325.

Although the states of Pennsylvania, Virginia and Ohio subsidized privately-operated turnpike companies, most turnpikes were financed solely by private stock subscription and structured to pay dividends. This was a significant achievement, considering the large construction costs (averaging around $1,500 to $2,000 per mile) and the typical length (15 to 40 miles). But the achievement was most striking because, as New England historian Edward Kirkland (1948, 45) put it, “the turnpikes did not make money. As a whole this was true; as a rule it was clear from the beginning.” Organizers and “investors” generally regarded the initial proceeds from sale of stock as a fund from which to build the facility, which would then earn enough in toll receipts to cover operating expenses. One might hope for dividend payments as well, but “it seems to have been generally known long before the rush of construction subsided that turnpike stock was worthless” (Wood 1919, 63).3

Turnpikes promised little in the way of direct dividends and profits, but they offered potentially large indirect benefits. Because turnpikes facilitated movement and trade, nearby merchants, farmers, land owners, and ordinary residents would benefit from a turnpike. Gazetteer Thomas F. Gordon aptly summarized the relationship between these “indirect benefits” and investment in turnpikes: “None have yielded profitable returns to the stockholders, but everyone feels that he has been repaid for his expenditures in the improved value of his lands, and the economy of business” (quoted in Majewski 2000, 49). Gordon’s statement raises an important question. If one could not be excluded from benefiting from a turnpike, and if dividends were not in the offing, what incentive would anyone have to help finance turnpike construction? The turnpike communities faced a serious free-rider problem.

Nevertheless, hundreds of communities overcame the free-rider problem, mostly through a civic-minded culture that encouraged investment for long-term community gain. Alexis de Tocqueville observed that, excepting those of the South, Americans were infused with a spirit of public-mindedness. Their strong sense of community spirit resulted in the funding of schools, libraries, hospitals, churches, canals, dredging companies, wharves, and water companies, as well as turnpikes (Goodrich 1948). Vibrant community and cooperation sprung, according to Tocqueville, from the fertile ground of liberty:

If it is a question of taking a road past his property, [a man] sees at once that this small public matter has a bearing on his greatest private interests, and there is no need to point out to him the close connection between his private profit and the general interest. … Local liberties, then, which induce a great number of citizens to value the affection of their kindred and neighbors, bring men constantly into contact, despite the instincts which separate them, and force them to help one another. … The free institutions of the United States and the political rights enjoyed there provide a thousand continual reminders to every citizen that he lives in society. … Having no particular reason to hate others, since he is neither their slave nor their master, the American’s heart easily inclines toward benevolence. At first it is of necessity that men attend to the public interest, afterward by choice. What had been calculation becomes instinct. By dint of working for the good of his fellow citizens, he in the end acquires a habit and taste for serving them. … I maintain that there is only one effective remedy against the evils which equality may cause, and that is political liberty (Alexis de Tocqueville, 511-13, Lawrence/Mayer edition).

Tocqueville’s testimonial is broad and general, but its accuracy is seen in the archival records and local histories of the turnpike communities. Stockholder’s lists reveal a web of neighbors, kin, and locally prominent figures voluntarily contributing to what they saw as an important community improvement. Appeals made in newspapers, local speeches, town meetings, door-to-door solicitations, correspondence, and negotiations in assembling the route stressed the importance of community improvement rather than dividends.4 Furthermore, many toll road projects involved the effort to build a monument and symbol of the community. Participating in a company by donating cash or giving moral support was a relatively rewarding way of establishing public services; it was pursued at least in part for the sake of community romance and adventure as ends in themselves (Brown 1973, 68). It should be noted that turnpikes were not entirely exceptional enterprises in the early nineteenth century. In many fields, the corporate form had a public-service ethos, aimed not primarily at paying dividends, but at serving the community (Handlin and Handlin 1945, 22, Goodrich 1948, 306, Hurst 1970, 15).

Given the importance of community activism and long-term gains, most “investors” tended to be not outside speculators, but locals positioned to enjoy the turnpikes’ indirect benefits. “But with a few exceptions, the vast majority of the stockholders in turnpike were farmers, land speculators, merchants or individuals and firms interested in commerce” (Durrenberger 1931, 104). A large number of ordinary households held turnpike stock. Pennsylvania compiled the most complete set of investment records, which show that more than 24,000 individuals purchased turnpike or toll bridge stock between 1800 and 1821. The average holding was $250 worth of stock, and the median was less than $150 (Majewski 2001). Such sums indicate that most turnpike investors were wealthier than the average citizen, but hardly part of the urban elite that dominated larger corporations such as the Bank of the United States. County-level studies indicate that most turnpike investment came from farmers and artisans, as opposed to the merchants and professionals more usually associated with early corporations (Majewski 2000, 49-53).

Turnpikes became symbols of civic pride only after enduring a period of substantial controversy. In the 1790s and early 1800s, some Americans feared that turnpikes would become “engrossing monopolists” who would charge travelers exorbitant tolls or abuse eminent domain privileges. Others simply did not want to pay for travel that had formerly been free. To conciliate these different groups, legislators wrote numerous restrictions into turnpike charters. Toll gates, for example, often could be spaced no closer than every five or even ten miles. This regulation enabled some users to travel without encountering a toll gate, and eased the practice of steering horses and the high-mounted vehicles of the day off the main road so as to evade the toll gate, a practice known as “shunpiking.” The charters or general laws also granted numerous exemptions from toll payment. In New York, the exempt included people traveling on family business, those attending or returning from church services and funerals, town meetings, blacksmiths’ shops, those on military duty, and those who lived within one mile of a toll gate. In Massachusetts some of the same trips were exempt and also anyone residing in the town where the gate is placed and anyone “on the common and ordinary business of family concerns” (Laws of Massachusetts 1805, chapter 79, 649). In the face of exemptions and shunpiking, turnpike operators sometimes petitioned authorities for a toll hike, stiffer penalties against shunpikers, or the relocating of the toll gate. The record indicates that petitioning the legislature for such relief was a costly and uncertain affair (Klein and Majewski 1992, 496-98).

In view of the difficult regulatory environment and apparent free-rider problem, the success of early turnpikes in raising money and improving roads was striking. The movement built new roads at rates previously unheard of in America. Table 3 gives ballpark estimates of the cumulative investment in constructing turnpikes up to 1830 in New England and the Middle Atlantic. Repair and maintenance costs are excluded. These construction investment figures are probably too low – they generally exclude, for example, tolls revenue that might have been used to finish construction – but they nevertheless indicate the ability of private initiatives to raise money in an economy in which capital was in short supply. Turnpike companies in these states raised more than $24 million by 1830, an amount equaling 6.15 percent of those states’ 1830 GDP. To put this into comparative perspective, between 1956 and 1995 all levels of government spent $330 billion (in 1996 dollars) in building the interstate highway system, a cumulative total equaling only 4.30 percent of 1996 GDP.

Sources: Pennsylvania turnpike investment: Durrenberger 1931: 61); New England turnpike investment: Taylor 1934: 210-11; New York, New Jersey, and Maryland turnpike investment: Fishlow 2000, 549. Only private investment is included. State GDP data come from Bodenhorn 2000: 237. Figures for the cost of the Interstate Highway System can be found at http://www.publicpurpose.com/hwy-is$.htm. Please note that our investment figures generally do not include investment to finish roads by loans or the use of toll revenue. The table therefore underestimates investment in turnpikes.

The organizational advantages of turnpike companies relative to government road not only generated more road mileage, but also higher quality roads (Taylor 1934, 334, Parks 1967, 23, 27). New York state gazetteer Horatio Spafford (1824, 125) wrote that turnpikes have been “an excellent school, in every road district, and people now work the highways to much better advantage than formerly.” Companies worked to intelligently develop roadway to achieve connective communication. The corporate form traversed town and county boundaries, so a single company could bring what would otherwise be separate segments together into a single organization. “Merchants and traders in New York sponsored pikes leading across northern New Jersey in order to tap the Delaware Valley trade which would otherwise have gone to Philadelphia” (Lane 1939, 156).

Turnpike networks became highly organized systems that sought to find the most efficient way of connecting eastern cities with western markets. Decades before the Erie Canal, private individuals realized the natural opening through the Appalachians and planned a system of turnpikes connecting Albany to Syracuse and beyond. Figure 1 shows the principal routes westward from Albany. The upper route begins with the Albany & Schenectady Turnpike, connects to the Mohawk Turnpike, and then the Seneca Turnpike. The lower route begins with the First Great Western Turnpike and then branches at Cherry Valley into the Second and Third Great Western Turnpikes. Corporate papers of these companies reveal that organizers of different companies talked to each other; they were quite capable of coordinating their intentions and planning mutually beneficial activities by voluntary means. When the Erie Canal was completed in 1825 it roughly followed the alignment of the upper route and greatly reduced travel on the competing turnpikes (Baer, Klein, and Majewski 1992).

Another excellent example of turnpike integration was the Pittsburgh Pike. The Pennsylvania route consisted of a combination of five turnpike companies, each of which built a road segment connecting Pittsburgh and Harrisburg, where travelers could take another series of turnpikes to Philadelphia. Completed in 1820, the Pittsburgh Pike greatly improved freighting over the rugged Allegheny Mountains. Freight rates between Philadelphia and Pittsburgh were cut in half because wagons increased their capacity, speed, and certainty (Reiser 1951, 76-77). Although the state government invested in the companies that formed the Pittsburgh Pike, records of the two companies for which we have complete investment information shows that private interests contributed 62 percent of the capital (calculated from Majewski 2000: 47-51: Reiser 1951, 76). Residents in numerous communities contributed to individual projects out of their own self interest. Their provincialism nevertheless helped create a coherent and integrated system.

A comparison of the Pittsburgh Pike and the National Road demonstrated the advantages of turnpike corporations over roads financed directly from government sources. Financed by the federal government, the National Road was built between Cumberland, Maryland, and Wheeling, West Virginia, where it was then extended through the Midwest with the hopes of reaching the Mississippi River. Although it never reached the Mississippi, the Federal Government nevertheless spent $6.8 million on the project (Goodrich 1960, 54, 65). The trans-Appalachian section of the National Road competed directly against the Pittsburgh Pike. From the records of two of the five companies that formed the Pittsburgh Pike, we estimate it cost $4,805 per mile to build (Majewski 2000, 47-51, Reiser 1951, 76). The Federal government, on the other hand, spent $13,455 per mile to complete the first 200 miles of the National Road (Fishlow 2000, 549). Besides costing much less, the Pennsylvania Pike was far better in quality. The toll gates along the Pittsburgh Pike provided a steady stream of revenue for repairs. The National Road, on the other hand, depended upon intermittent government outlays for basic maintenance, and the road quickly deteriorated. One army engineer in 1832 found “the road in a shocking condition, and every rod of it will require great repair; some of it now is almost impassable” (quoted in Searight, 60). Historians have found that travelers generally preferred to take the Pittsburgh Pike rather than the National Road.

The Plank Road Boom, 1847–1853

By the 1840s the major turnpikes were increasingly eclipsed by the (often state-subsidized) canals and railroads. Many toll roads reverted to free public use and quickly degenerated into miles of dust, mud and wheel-carved ruts. To link to the new and more powerful modes of communication, well-maintained, short-distance highways were still needed, but because governments became overextended in poor investments in canals, taxpayers were increasingly reluctant to fund internal improvements. Private entrepreneurs found the cost of the technologically most attractive road surfacing material (macadam, a compacted covering of crushed stones) prohibitively expensive at $3,500 per mile. Thus the ongoing need for new feeder roads spurred the search for innovation, and plank roads – toll roads surfaced with wooden planks – seemed to fit the need.

The plank road technique appears to have been introduced into Canada from Russia in 1840. It reached New York a few years later, after the village Salina, near Syracuse, sent civil engineer George Geddes to Toronto to investigate. After two trips Geddes (whose father, James, was an engineer for the Erie and Champlain Canals, and an enthusiastic canal advocate) was convinced of the plank roads’ feasibility and became their great booster. Plank roads, he wrote in Scientific American (Geddes 1850a), could be built at an average cost of $1,500 – although $1,900 would have been more accurate (Majewski, Baer and Klein 1994, 109, fn15). Geddes also published a pamphlet containing an influential, if overly optimistic, estimate that Toronto’s road planks had lasted eight years (Geddes 1850b). Simplicity of design made plank roads even more attractive. Road builders put down two parallel lines of timbers four or five feet apart, which formed the “foundation” of the road. They then laid, at right angles, planks that were about eight feet long and three or four inches thick. Builders used no nails or glue to secure the planks – they were secured only by their own weight – but they did build ditches on each side of the road to insure proper drainage (Klein and Majewski 1994, 42-43).

No less important than plank road economics and technology were the public policy changes that accompanied plank roads. Policymakers, perhaps aware that overly restrictive charters had hamstrung the first turnpike movement, were more permissive in the plank road era. Adjusting for deflation, toll rates were higher, toll gates were separated by shorter distances, and fewer local travelers were exempted from payment of tolls.

Although few today have heard of them, for a short time it seemed that plank roads might be one of the great innovations of the day. In just a few years, more than 1,000 companies built more than 10,000 miles of plank roads nationwide, including more than 3,500 miles in New York (Klein and Majewski 1994, Majewski, Baer, Klein 1993). According to one observer, plank roads, along with canals and railroads, were “the three great inscriptions graven on the earth by the hand of modern science, never to be obliterated, but to grow deeper and deeper” (Bogart 1851).

Except for most of New England, plank roads were chartered throughout the United States, especially in the top lumber-producing states of the Midwest and Mid-Atlantic states, as shown in Table 4.

Table 4: Plank Road Incorporation by State

State

Number

New York

335

Pennsylvania

315

Ohio

205

Wisconsin

130

Michigan

122

Illinois

88

North Carolina

54

Missouri

49

New Jersey

25

Georgia

16

Iowa

14

Vermont

14

Maryland

13

Connecticut

7

Massachusetts

1

Rhode Island, Maine

0

Total

1388

Notes: The figure for Ohio is through 1851; Pennsylvania, New Jersey, and Maryland are through 1857. Few plank roads were incorporated after 1857. In western states, some roads were incorporated and built as plank roads, so the 1388 total is not to be taken as a total for the nation. For a complete description of the sources for this table, see Majewski, Baer, & Klein 1993: 110.

New York, the leading lumber state, had both the greatest number of plank road charters (350) and the largest value of lumber production ($13,126,000 in 1849 dollars). Plank roads were especially popular in rural dairy counties, where farmers needed quick and dependable transportation to urban markets (Majewski, Baer and Klein 1993).

The plank road and eastern turnpike episodes shared several features in common. Like the earlier turnpikes, investment in plank road companies came from local landowners, farmers, merchants, and professionals. Stock purchases were motivated less by the prospect of earning dividends than by the convenience and increased trade and development that the roads would bring. To many communities, plank roads held the hope of revitalization and the reversal (or slowing) of relative decline. But those hoping to attain these benefits once again were faced with a free-rider problem. Investors in plank roads, like the investors of the earlier turnpikes, were motivated often by esteem mechanisms – community allegiance and appreciation, reputational incentives, and their own conscience.

Although plank roads were smooth and sturdy, faring better in rain and snow than did dirt and gravel roads, they lasted only four or five years – not the eight to twelve years that promoters had claimed. Thus, the rush of construction ended suddenly by 1853, and by 1865 most companies had either switched to dirt and gravel surfaces or abandoned their road altogether.

Toll Roads in the Far West, 1850 to 1902

Unlike the areas served by the earlier turnpikes and plank roads, Colorado, Nevada, and California in the 1850s and 1860s lacked the settled communities and social networks that induced participation in community enterprise and improvement. Miners and the merchants who served them knew that the mining boom would not continue indefinitely and therefore seldom planted deep roots. Nor were the large farms that later populated California ripe for civic engagement in anywhere near the degree of the small farms of the east. Society in the early years of the West was not one where town meetings, door-to-door solicitations, and newspaper campaigns were likely to rally broad support for a road project. The lack of strong communities also meant that there would be few opponents to pressure the government for toll exemptions and otherwise hamper toll road operations. These conditions ensured that toll roads would tend to be more profit-oriented than the eastern turnpikes and plank road companies. Still, it is not clear whether on the whole the toll roads of the Far West were profitable.

The California toll road era began in 1850 after passage of general laws of incorporation. In 1853 new laws were passed reducing stock subscription requirements from $2,000 per mile to $300 per mile. The 1853 laws also delegated regulatory authority to the county governments. Counties were allowed “to set tolls at rates not to prevent a return of 20 percent,” but they did not interfere with the location of toll roads and usually looked favorably on the toll road companies. After passage of the 1853 laws, the number of toll road incorporations increased dramatically, peaking to nearly 40 new incorporations in 1866 alone. Companies were also created by special acts of the legislature. And sometimes they seemed to have operated without formal incorporation at all. David and Linda Beito (1998, 75, 84) show that in Nevada many entrepreneurs had built and operated toll roads – or other basic infrastructure – before there was a State of Nevada, and some operated for years without any government authority at all.

All told, in the Golden State, approximately 414 toll road companies were initiated,5 resulting in at least 159 companies that successfully built and operated toll roads. Table 5 provides some rough numbers for toll roads in western states. The numbers presented there are minimums. For California and Nevada, the numbers probably only slightly underestimate the true totals; for the other states the figures are quite sketchy and might significantly underestimate true totals. Again, an abundance of testimony indicates that the private road companies were the serious road builders, in terms of quantity and quality (see the ten quotations at Klein and Yin 1996, 689-90).

Table 5: Rough Minimums on Toll Roads in the West

Toll Road
Incorporations

Toll Roads
actually built

California

414

159

Colorado

350

n.a.

Nevada

n.a.

117

Texas

50

n.a.

Wyoming

11

n.a.

Oregon

10

n.a.

Sources: For California, Klein and Yin 1996: 681-82; for Nevada, Beito and Beito 1998: 74; for the other states, notes and correspondence in D. Klein’s files.

Table 6 makes an attempt to justify guesses about total number of toll road companies and total toll road miles. The first three numbers in the “Incorporations” column come from Tables 2, 4, and 5. The estimates of success rates and average road length (in the third and fourth columns) are extrapolations from components that have been studied with more care. We have made these estimates conservative, in the sense of avoiding any overstatement of the extent of private road building. The ~ symbol has been used to keep the reader mindful of the fact that many of these numbers are estimates. The numbers in the right hand column have been rounded to the nearest 1000, so as to avoid any impression of accuracy. The “Other” row throws in a line to suggest a minimum to cover all the regions, periods, and road types not covered in Tables 2, 4, and 5. For example, the “Other” row would cover turnpikes in the East, South and Midwest after 1845 (Virginia’s turnpike boom came in the late 1840s and 1850s), and all turnpikes and plank roads in Indiana, whose county-based incorporation, it seems, has never been systematically researched. Ideally, not only would the numbers be more definite and complete, but there would be a weighting by years of operation. The “30,000 – 52,000 miles” should be read as a range for the sum of all the miles operated by any company at any time during the 100+ year period.

Table 6: A Rough Tally of the Private Toll Roads

Toll Road Movements

Incorporations

% Successful in Building Road

Roads Built and Operated

Average Road Length

Toll Road

Miles Operated

Turnpikes incorporated from 1792 to 1845

1562

~ 55 %

~ 859

~ 18

~ 15,000

Plank Roads incorporated from 1845 to roughly 1860

1388

~ 65 %

~ 902

~ 10

~ 9,000

Toll Roads in the West incorporated from 1850 to roughly 1902

~ 1127

~ 40 %

~ 450

~ 15

~ 7,000

Other

~ <1000>

[a rough guess]

~ 50 %

~ 500

~ 16

~ 8,000

Ranges for

Totals

5,000 – 5,600

incorporations

48 – 60 percent

2,500 – 3,200 roads

12 – 16 miles

30,000 – 52,000

miles

Sources: Those of Tables 2, 4, and 5, plus the research files of the authors.

The End of Toll Roads in the Progressive Period

In 1880 many toll road companies nationwide continued to operate – probably in the range of 400 to 600 companies.6 But by 1920 the private toll road was almost entirely stamped out. From Maine to California, the laws and political attitudes from around 1880 onward moved against the handling of social affairs in ways that seemed informal, inexpert and unsystematic. Progressivism represented a burgeoning of more collectivist ideologies and policy reforms. Many progressive intellectuals took inspiration from European socialist doctrines. Although the politics of restraining corporate evils had a democratic and populist aspect, the bureaucratic spirit was highly managerial and hierarchical, intending to replicate the efficiency of large corporations in the new professional and scientific administration of government (Higgs 1987, 113-116, Ekirch 1967, 171-94).

One might point to the rise of the bicycle and later the automobile, which needed a harder and smoother surface, to explain the growth of America’s road network in the Progressive period. But such demand-side changes do not speak to the issues of road ownership and tolling. Automobiles achieved higher speeds, which made stopping to pay a toll more inconvenient, and that may have reinforced the anti-toll-road company movement that was underway prior to the automobile. Such developments figured into the history of road policy, but they really did not provide a good reason for the policy movement against the toll roads The following words of a county board of supervisors in New York in 1906 indicate a more general ideological bent against toll road companies:

[T]he ownership and operation of this road by a private corporation is contrary to public sentiment in this county, and [the] cause of good roads, which has received so much attention in this state in recent years, requires that this antiquated system should be abolished. … That public opinion throughout the state is strongly in favor of the abolition of toll roads is indicated by the fact that since the passage of the act of 1899, which permits counties to acquire these roads, the boards of supervisors of most of the counties where such roads have existed have availed themselves of its provisions and practically abolished the toll road.

Given such attitudes, it was no wonder that within the U. S. Department of Agricultural, the new Office of Road Inquiry began in 1893 to gather information, conduct research, and “educate” for better roads. The new bureaucracy opposed toll roads, and the Federal Highway Act of 1916 barred the use of tolls on highways receiving federal money (Seely 1987, 15, 79). Anti-toll-road sentiment became state and national policy.

Conclusions and Implications

Throughout the nineteenth-century, the United States was notoriously “land-rich” and “capital poor.” The viability of turnpikes shows how Americans devised institutions – in this case, toll-collecting corporations – that allowed them to invest precious capital in important public projects. What’s more, turnpikes paid little in direct dividends and stock appreciation, yet still attracted investment. Investors, of course, cared for long-term economic development, but that does not account for how turnpike organizers overcame the important public goods problem of buying turnpike stock. Esteem, social pressure, and other non-economic motivations influenced local residents to make investments that they knew would be unprofitable (at least in a direct sense) but would nevertheless help the entire community. On the other hand, the turnpike companies enjoyed the organizational clarity of stock ownership and residual returns. All companies faced the possibility of pressure from investors, who might have wanted to salvage something of their investment. Residual claimancy may have enhanced the viability of many projects, including communitarian projects undertaken primarily for use and esteem.

The combining of these two ingredients – the appeal of use and esteem, and the incentives and proprietary clarity of residual returns – is today severely undermined by the modern legal bifurcation of private initiative into “not-for-profit” and “for-profit” concerns. Not-for-profit corporations can appeal to use and esteem but cannot organize themselves to earn residual returns. For-profit corporations organize themselves for residual returns but cannot very well appeal to use and esteem. As already noted, prior to modern tax law and regulation, the old American toll roads were, relative to the British turnpike trusts, more, not less, use-and-esteem oriented by virtue of being structured to pay dividends rather than interest. Like the eighteenth century British turnpike trusts, the twentieth century American governmental toll projects financed (in part) by privately purchased bonds generally failed, relative to the nineteenth century American company model, to draw on use and esteem motivations.

The turnpike experience of nineteenth-century America suggests that the stock/dividend company can also be a fruitful, efficient, and socially beneficial way to make losses and go on making losses. The success of turnpikes suggests that our modern sensibility of dividing enterprises between profit and non-profit – a distinction embedded in modern tax laws and regulations – unnecessarily impoverishes the imagination of economists and other policy makers. Without such strict legal and institutional bifurcation, our own modern society might better recognize the esteem in trade and the trade in esteem.

References

Baer, Christopher T., Daniel B. Klein, and John Majewski. “From Trunk to Branch: Toll Roads in New York, 1800-1860.” Essays in Economic and Business History XI (1993): 191-209.

Durrenberger, J.A. Turnpikes: A Study of the Toll Road Movement in the Middle Atlantic States and Maryland. Valdosta, GA.: Southern Stationery and Printing, 1981.

Ekirch, Arthur A., Jr. The Decline of American Liberalism. New York: Atheneum, 1967.

Fishlow, Albert. “Internal Transportation in the Nineteenth and Early Twentieth Centuries.” In The Cambridge Economic History of the United States, Vol. II: The Long Nineteenth Century, edited by Stanley L. Engerman and Robert E. Gallman. New York: Cambridge University Press, 2000.

Nash, Christopher A. “Integration of Public Transport: An Economic Assessment.” In Bus Deregulation and Privatisation: An International Perspective, edited by J.S. Dodgson and N. Topham. Brookfield, VT: Avebury, 1988

Nash, Gerald D. State Government and Economic Development: A History of Administrative Policies in California, 1849-1933. Berkeley: University of California Press (Institute of Governmental Studies), 1964.

John Majewski, Department of History, University of California, Santa Barbara, 93106; Email: Majewski@history.ucsb.edu.

2 The term “turnpike” comes from Britain, referring to a long staff (or pike) that acted as a swinging barrier or tollgate. In nineteenth century America, “turnpike” specifically means a toll road with a surface of gravel and earth, as opposed to “plank roads” which refer to toll roads surfaced by wooden planks. Later in the century, all such roads were typically just “toll roads.”

3 For a discussion of returns and expectations, see Klein 1990: 791-95.

5 The 414 figure consists of 222 companies organized under the general law, 102 charted by the legislature, and 90 companies that we learned of by county records, local histories, and various other sources.

6 Durrenberger (1931: 164) notes that in 1911 there were 108 turnpikes operating in Pennsylvania alone.

Jenny Bourne, Carleton College

Slavery is fundamentally an economic phenomenon. Throughout history, slavery has existed where it has been economically worthwhile to those in power. The principal example in modern times is the U.S. South. Nearly 4 million slaves with a market value estimated to be between $3.1 and $3.6 billion lived in the U.S. just before the Civil War. Masters enjoyed rates of return on slaves comparable to those on other assets; cotton consumers, insurance companies, and industrial enterprises benefited from slavery as well. Such valuable property required rules to protect it, and the institutional practices surrounding slavery display a sophistication that rivals modern-day law and business.

THE SPREAD OF SLAVERY IN THE U.S.

Not long after Columbus set sail for the New World, the French and Spanish brought slaves with them on various expeditions. Slaves accompanied Ponce de Leon to Florida in 1513, for instance. But a far greater proportion of slaves arrived in chains in crowded, sweltering cargo holds. The first dark-skinned slaves in what was to become British North America arrived in Virginia — perhaps stopping first in Spanish lands — in 1619 aboard a Dutch vessel. From 1500 to 1900, approximately 12 million Africans were forced from their homes to go westward, with about 10 million of them completing the journey. Yet very few ended up in the British colonies and young American republic. By 1808, when the trans-Atlantic slave trade to the U.S. officially ended, only about 6 percent of African slaves landing in the New World had come to North America.

Slavery in the North

Colonial slavery had a slow start, particularly in the North. The proportion there never got much above 5 percent of the total population. Scholars have speculated as to why, without coming to a definite conclusion. Some surmise that indentured servants were fundamentally better suited to the Northern climate, crops, and tasks at hand; some claim that anti-slavery sentiment provided the explanation. At the time of the American Revolution, fewer than 10 percent of the half million slaves in the thirteen colonies resided in the North, working primarily in agriculture. New York had the greatest number, with just over 20,000. New Jersey had close to 12,000 slaves. Vermont was the first Northern region to abolish slavery when it became an independent republic in 1777. Most of the original Northern colonies implemented a process of gradual emancipation in the late eighteenth and early nineteenth centuries, requiring the children of slave mothers to remain in servitude for a set period, typically 28 years. Other regions above the Mason-Dixon line ended slavery upon statehood early in the nineteenth century — Ohio in 1803 and Indiana in 1816, for instance.

TABLE 1
Population of the Original Thirteen Colonies, selected years by type

1750

1750

1790

1790

1790

1810

1810

1810

1860

1860

1860

State

White

Black

White

Free

Slave

White

Free

Slave

White

Free

Slave

Nonwhite

Nonwhite

Nonwhite

108,270

3,010

232,236

2,771

2,648

255,179

6,453

310

451,504

8,643

-

Connecticut

27,208

1,496

46,310

3,899

8,887

55,361

13,136

4,177

90,589

19,829

1,798

Delaware

4,200

1,000

52,886

398

29,264

145,414

1,801

105,218

591,550

3,538

462,198

Georgia

97,623

43,450

208,649

8,043

103,036

235,117

33,927

111,502

515,918

83,942

87,189

Maryland

183,925

4,075

373,187

5,369

-

465,303

6,737

-

1,221,432

9,634

-

Massachusetts

26,955

550

141,112

630

157

182,690

970

-

325,579

494

-

New Hampshire

66,039

5,354

169,954

2,762

11,423

226,868

7,843

10,851

646,699

25,318

-

New Jersey

65,682

11,014

314,366

4,682

21,193

918,699

25,333

15,017

3,831,590

49,145

-

New York

53,184

19,800

289,181

5,041

100,783

376,410

10,266

168,824

629,942

31,621

331,059

North Carolina

116,794

2,872

317,479

6,531

3,707

786,804

22,492

795

2,849,259

56,956

-

Pennsylvania

29,879

3,347

64,670

3,484

958

73,214

3,609

108

170,649

3,971

-

Rhode Island

25,000

39,000

140,178

1,801

107,094

214,196

4,554

196,365

291,300

10,002

402,406

South Carolina

129,581

101,452

442,117

12,866

292,627

551,534

30,570

392,518

1,047,299

58,154

490,865

Virginia

934,340

236,420

2,792,325

58,277

681,777

4,486,789

167,691

1,005,685

12,663,310

361,247

1,775,515

United States

Source: Historical Statistics of the U.S. (1970), Franklin (1988).

Slavery in the South

Throughout colonial and antebellum history, U.S. slaves lived primarily in the South. Slaves comprised less than a tenth of the total Southern population in 1680 but grew to a third by 1790. At that date, 293,000 slaves lived in Virginia alone, making up 42 percent of all slaves in the U.S. at the time. South Carolina, North Carolina, and Maryland each had over 100,000 slaves. After the American Revolution, the Southern slave population exploded, reaching about 1.1 million in 1810 and over 3.9 million in 1860.

TABLE 2
Population of the South 1790-1860 by type

Year

White

Free Nonwhite

Slave

1790

1,240,454

32,523

654,121

1800

1,691,892

61,575

851,532

1810

2,118,144

97,284

1,103,700

1820

2,867,454

130,487

1,509,904

1830

3,614,600

175,074

1,983,860

1840

4,601,873

207,214

2,481,390

1850

6,184,477

235,821

3,200,364

1860

8,036,700

253,082

3,950,511

Source: Historical Statistics of the U.S. (1970).

Slave Ownership Patterns

Despite their numbers, slaves typically comprised a minority of the local population. Only in antebellum South Carolina and Mississippi did slaves outnumber free persons. Most Southerners owned no slaves and most slaves lived in small groups rather than on large plantations. Less than one-quarter of white Southerners held slaves, with half of these holding fewer than five and fewer than 1 percent owning more than one hundred. In 1860, the average number of slaves residing together was about ten.

TABLE 3
Slaves as a Percent of the Total Population
selected years, by Southern state

1750

1790

1810

1860

State

Black/total

Slave/total

Slave/total

Slave/total

population

population

population

population

Alabama

45.12

Arkansas

25.52

Delaware

5.21

15.04

5.75

1.60

Florida

43.97

Georgia

19.23

35.45

41.68

43.72

Kentucky

16.87

19.82

19.51

Louisiana

46.85

Maryland

30.80

32.23

29.30

12.69

Mississippi

55.18

Missouri

9.72

North Carolina

27.13

25.51

30.39

33.35

South Carolina

60.94

43.00

47.30

57.18

Tennessee

17.02

24.84

Texas

30.22

Virginia

43.91

39.14

40.27

30.75

Overall

37.97

33.95

33.25

32.27

Sources: Historical Statistics of the United States (1970), Franklin (1988).

TABLE 4
Holdings of Southern Slaveowners
by states, 1860

State

Total

Held 1

Held 2

Held 3

Held 4

Held 5

Held 1-5

Held 100-

Held 500+

slaveholders

slave

slaves

Slaves

slaves

slaves

slaves

499 slaves

slaves

AL

33,730

5,607

3,663

2,805

2,329

1,986

16,390

344

-

AR

11,481

2,339

1,503

1,070

894

730

6,536

65

1

DE

587

237

114

74

51

34

510

-

-

FL

5,152

863

568

437

365

285

2,518

47

-

GA

41,084

6,713

4,335

3,482

2,984

2,543

20,057

211

8

KY

38,645

9,306

5,430

4,009

3,281

2,694

24,720

7

-

LA

22,033

4,092

2,573

2,034

1,536

1,310

11,545

543

4

MD

13,783

4,119

1,952

1,279

1,023

815

9,188

16

-

MS

30,943

4,856

3,201

2,503

2,129

1,809

14,498

315

1

MO

24,320

6,893

3,754

2,773

2,243

1,686

17,349

4

-

NC

34,658

6,440

4,017

3,068

2,546

2,245

18,316

133

-

SC

26,701

3,763

2,533

1,990

1,731

1,541

11,558

441

8

TN

36,844

7,820

4,738

3,609

3,012

2,536

21,715

47

-

TX

21,878

4,593

2,874

2,093

1,782

1,439

12,781

54

-

VA

52,128

11,085

5,989

4,474

3,807

3,233

28,588

114

-

TOTAL

393,967

78,726

47,244

35,700

29,713

24,886

216,269

2,341

22

Source: Historical Statistics of the United States (1970).

Rapid Natural Increase in U.S. Slave Population

How did the U.S. slave population increase nearly fourfold between 1810 and 1860, given the demise of the trans-Atlantic trade? They enjoyed an exceptional rate of natural increase. Unlike elsewhere in the New World, the South did not require constant infusions of immigrant slaves to keep its slave population intact. In fact, by 1825, 36 percent of the slaves in the Western hemisphere lived in the U.S. This was partly due to higher birth rates, which were in turn due to a more equal ratio of female to male slaves in the U.S. relative to other parts of the Americas. Lower mortality rates also figured prominently. Climate was one cause; crops were another. U.S. slaves planted and harvested first tobacco and then, after Eli Whitney’s invention of the cotton gin in 1793, cotton. This work was relatively less grueling than the tasks on the sugar plantations of the West Indies and in the mines and fields of South America. Southern slaves worked in industry, did domestic work, and grew a variety of other food crops as well, mostly under less abusive conditions than their counterparts elsewhere. For example, the South grew half to three-quarters of the corn crop harvested between 1840 and 1860.

INSTITUTIONAL FRAMEWORK

Central to the success of slavery are political and legal institutions that validate the ownership of other persons. A Kentucky court acknowledged the dual character of slaves in Turner v. Johnson (1838): “[S]laves are property and must, under our present institutions, be treated as such. But they are human beings, with like passions, sympathies, and affections with ourselves.” To construct slave law, lawmakers borrowed from laws concerning personal property and animals, as well as from rules regarding servants, employees, and free persons. The outcome was a set of doctrines that supported the Southern way of life.

The English common law of property formed a foundation for U.S. slave law. The French and Spanish influence in Louisiana — and, to a lesser extent, Texas — meant that Roman (or civil) law offered building blocks there as well. Despite certain formal distinctions, slave law as practiced differed little from common-law to civil-law states. Southern state law governed roughly five areas: slave status, masters’ treatment of slaves, interactions between slaveowners and contractual partners, rights and duties of noncontractual parties toward others’ slaves, and slave crimes. Federal law and laws in various Northern states also dealt with matters of interstate commerce, travel, and fugitive slaves.

Interestingly enough, just as slave law combined elements of other sorts of law, so too did it yield principles that eventually applied elsewhere. Lawmakers had to consider the intelligence and volition of slaves as they crafted laws to preserve property rights. Slavery therefore created legal rules that could potentially apply to free persons as well as to those in bondage. Many legal principles we now consider standard in fact had their origins in slave law.

Legal Status Of Slaves And Blacks

By the end of the seventeenth century, the status of blacks — slave or free — tended to follow the status of their mothers. Generally, “white” persons were not slaves but Native and African Americans could be. One odd case was the offspring of a free white woman and a slave: the law often bound these people to servitude for thirty-one years. Conversion to Christianity could set a slave free in the early colonial period, but this practice quickly disappeared.

Skin Color and Status

Southern law largely identified skin color with status. Those who appeared African or of African descent were generally presumed to be slaves. Virginia was the only state to pass a statute that actually classified people by race: essentially, it considered those with one quarter or more black ancestry as black. Other states used informal tests in addition to visual inspection: one-quarter, one-eighth, or one-sixteenth black ancestry might categorize a person as black.

Even if blacks proved their freedom, they enjoyed little higher status than slaves except, to some extent, in Louisiana. Many Southern states forbade free persons of color from becoming preachers, selling certain goods, tending bar, staying out past a certain time of night, or owning dogs, among other things. Federal law denied black persons citizenship under the Dred Scott decision (1857). In this case, Chief Justice Roger Taney also determined that visiting a free state did not free a slave who returned to a slave state, nor did traveling to a free territory ensure emancipation.

Rights And Responsibilities Of Slave Masters

Southern masters enjoyed great freedom in their dealings with slaves. North Carolina Chief Justice Thomas Ruffin expressed the sentiments of many Southerners when he wrote in State v. Mann (1829): “The power of the master must be absolute, to render the submission of the slave perfect.” By the nineteenth century, household heads had far more physical power over their slaves than their employees. In part, the differences in allowable punishment had to do with the substitutability of other means of persuasion. Instead of physical coercion, antebellum employers could legally withhold all wages if a worker did not complete all agreed-upon services. No such alternate mechanism existed for slaves.

Despite the respect Southerners held for the power of masters, the law — particularly in the thirty years before the Civil War — limited owners somewhat. Southerners feared that unchecked slave abuse could lead to theft, public beatings, and insurrection. People also thought that hungry slaves would steal produce and livestock. But masters who treated slaves too well, or gave them freedom, caused consternation as well. The preamble to Delaware’s Act of 1767 conveys one prevalent view: “[I]t is found by experience, that freed [N]egroes and mulattoes are idle and slothful, and often prove burdensome to the neighborhood wherein they live, and are of evil examples to slaves.” Accordingly, masters sometimes fell afoul of the criminal law not only when they brutalized or neglected their slaves, but also when they indulged or manumitted slaves. Still, prosecuting masters was extremely difficult, because often the only witnesses were slaves or wives, neither of whom could testify against male heads of household.

Law of Manumission

One area that changed dramatically over time was the law of manumission. The South initially allowed masters to set their slaves free because this was an inherent right of property ownership. During the Revolutionary period, some Southern leaders also believed that manumission was consistent with the ideology of the new nation. Manumission occurred only rarely in colonial times, increased dramatically during the Revolution, then diminished after the early 1800s. By the 1830s, most Southern states had begun to limit manumission. Allowing masters to free their slaves at will created incentives to emancipate only unproductive slaves. Consequently, the community at large bore the costs of young, old, and disabled former slaves. The public might also run the risk of having rebellious former slaves in its midst.

Antebellum U.S. Southern states worried considerably about these problems and eventually enacted restrictions on the age at which slaves could be free, the number freed by any one master, and the number manumitted by last will. Some required former masters to file indemnifying bonds with state treasurers so governments would not have to support indigent former slaves. Some instead required former owners to contribute to ex-slaves’ upkeep. Many states limited manumissions to slaves of a certain age who were capable of earning a living. A few states made masters emancipate their slaves out of state or encouraged slaveowners to bequeath slaves to the Colonization Society, which would then send the freed slaves to Liberia. Former slaves sometimes paid fees on the way out of town to make up for lost property tax revenue; they often encountered hostility and residential fees on the other end as well. By 1860, most Southern states had banned in-state and post-mortem manumissions, and some had enacted procedures by which free blacks could voluntarily become slaves.

Other Restrictions

In addition to constraints on manumission, laws restricted other actions of masters and, by extension, slaves. Masters generally had to maintain a certain ratio of white to black residents upon plantations. Some laws barred slaves from owning musical instruments or bearing firearms. All states refused to allow slaves to make contracts or testify in court against whites. About half of Southern states prohibited masters from teaching slaves to read and write although some of these permitted slaves to learn rudimentary mathematics. Masters could use slaves for some tasks and responsibilities, but they typically could not order slaves to compel payment, beat white men, or sample cotton. Nor could slaves officially hire themselves out to others, although such prohibitions were often ignored by masters, slaves, hirers, and public officials. Owners faced fines and sometimes damages if their slaves stole from others or caused injuries.

Southern law did encourage benevolence, at least if it tended to supplement the lash and shackle. Court opinions in particular indicate the belief that good treatment of slaves could enhance labor productivity, increase plantation profits, and reinforce sentimental ties. Allowing slaves to control small amounts of property, even if statutes prohibited it, was an oft-sanctioned practice. Courts also permitted slaves small diversions, such as Christmas parties and quilting bees, despite statutes that barred slave assemblies.

Sale, Hire, And Transportation Of Slaves

Sales of Slaves

Slaves were freely bought and sold across the antebellum South. Southern law offered greater protection to slave buyers than to buyers of other goods, in part because slaves were complex commodities with characteristics not easily ascertained by inspection. Slave sellers were responsible for their representations, required to disclose known defects, and often liable for unknown defects, as well as bound by explicit contractual language. These rules stand in stark contrast to the caveat emptor doctrine applied in antebellum commodity sales cases. In fact, they more closely resemble certain provisions of the modern Uniform Commercial Code. Sales law in two states stands out. South Carolina was extremely pro-buyer, presuming that any slave sold at full price was sound. Louisiana buyers enjoyed extensive legal protection as well. A sold slave who later manifested an incurable disease or vice — such as a tendency to escape frequently — could generate a lawsuit that entitled the purchaser to nullify the sale.

Hiring Out Slaves

Slaves faced the possibility of being hired out by their masters as well as being sold. Although scholars disagree about the extent of hiring in agriculture, most concur that hired slaves frequently worked in manufacturing, construction, mining, and domestic service. Hired slaves and free persons often labored side by side. Bond and free workers both faced a legal burden to behave responsibly on the job. Yet the law of the workplace differed significantly for the two: generally speaking, employers were far more culpable in cases of injuries to slaves. The divergent law for slave and free workers does not necessarily imply that free workers suffered. Empirical evidence shows that nineteenth-century free laborers received at least partial compensation for the risks of jobs. Indeed, the tripartite nature of slave-hiring arrangements suggests why antebellum laws appeared as they did. Whereas free persons had direct work and contractual relations with their bosses, slaves worked under terms designed by others. Free workers arguably could have walked out or insisted on different conditions or wages. Slaves could not. The law therefore offered substitute protections. Still, the powerful interests of slaveowners also may mean that they simply were more successful at shaping the law. Postbellum developments in employment law — North and South — in fact paralleled earlier slave-hiring law, at times relying upon slave cases as legal precedents.

Public Transportation

Public transportation also figured into slave law: slaves suffered death and injury aboard common carriers as well as traveled as legitimate passengers and fugitives. As elsewhere, slave-common carrier law both borrowed from and established precedents for other areas of law. One key doctrine originating in slave cases was the “last-clear-chance rule.” Common-carrier defendants that had failed to offer slaves — even negligent slaves — a last clear chance to avoid accidents ended up paying damages to slaveowners. Slaveowner plaintiffs won several cases in the decade before the Civil War when engineers failed to warn slaves off railroad tracks. Postbellum courts used slave cases as precedents to entrench the last-clear-chance doctrine.

Slave Control: Patrollers And Overseers

Society at large shared in maintaining the machinery of slavery. In place of a standing police force, Southern states passed legislation to establish and regulate county-wide citizen patrols. Essentially, Southern citizens took upon themselves the protection of their neighbors’ interests as well as their own. County courts had local administrative authority; court officials appointed three to five men per patrol from a pool of white male citizens to serve for a specified period. Typical patrol duty ranged from one night per week for a year to twelve hours per month for three months. Not all white men had to serve: judges, magistrates, ministers, and sometimes millers and blacksmiths enjoyed exemptions. So did those in the higher ranks of the state militia. In many states, courts had to select from adult males under a certain age, usually 45, 50, or 60. Some states allowed only slaveowners or householders to join patrols. Patrollers typically earned fees for captured fugitive slaves and exemption from road or militia duty, as well as hourly wages. Keeping order among slaves was the patrollers’ primary duty. Statutes set guidelines for appropriate treatment of slaves and often imposed fines for unlawful beatings. In rare instances, patrollers had to compensate masters for injured slaves. For the most part, however, patrollers enjoyed quasi-judicial or quasi-executive powers in their dealings with slaves.

Overseers commanded considerable control as well. The Southern overseer was the linchpin of the large slave plantation. He ran daily operations and served as a first line of defense in safeguarding whites. The vigorous protests against drafting overseers into military service during the Civil War reveal their significance to the South. Yet slaves were too valuable to be left to the whims of frustrated, angry overseers. Injuries caused to slaves by overseers’ cruelty (or “immoral conduct”) usually entitled masters to recover civil damages. Overseers occasionally confronted criminal charges as well. Brutality by overseers naturally generated responses by their victims; at times, courts reduced murder charges to manslaughter when slaves killed abusive overseers.

Protecting The Master Against Loss: Slave Injury And Slave Stealing

Whether they liked it or not, many Southerners dealt daily with slaves. Southern law shaped these interactions among strangers, awarding damages more often for injuries to slaves than injuries to other property or persons, shielding slaves more than free persons from brutality, and generating convictions more frequently in slave-stealing cases than in other criminal cases. The law also recognized more offenses against slaveowners than against other property owners because slaves, unlike other property, succumbed to influence.

Just as assaults of slaves generated civil damages and criminal penalties, so did stealing a slave to sell him or help him escape to freedom. Many Southerners considered slave stealing worse than killing fellow citizens. In marked contrast, selling a free black person into slavery carried almost no penalty.

The counterpart to helping slaves escape — picking up fugitives — also created laws. Southern states offered rewards to defray the costs of capture or passed statutes requiring owners to pay fees to those who caught and returned slaves. Some Northern citizens worked hand-in-hand with their Southern counterparts, returning fugitive slaves to masters either with or without the prompting of law. But many Northerners vehemently opposed the peculiar institution. In an attempt to stitch together the young nation, the federal government passed the first fugitive slave act in 1793. To circumvent its application, several Northern states passed personal liberty laws in the 1840s. Stronger federal fugitive slave legislation then passed in 1850. Still, enough slaves fled to freedom — perhaps as many as 15,000 in the decade before the Civil War — with the help (or inaction) of Northerners that the profession of “slave-catching” evolved. This occupation was often highly risky — enough so that such men could not purchase life insurance coverage — and just as often highly lucrative.

Slave Crimes

Southern law governed slaves as well as slaveowners and their adversaries. What few due process protections slaves possessed stemmed from desires to grant rights to masters. Still, slaves faced harsh penalties for their crimes. When slaves stole, rioted, set fires, or killed free people, the law sometimes had to subvert the property rights of masters in order to preserve slavery as a social institution.

Slaves, like other antebellum Southern residents, committed a host of crimes ranging from arson to theft to homicide. Other slave crimes included violating curfew, attending religious meetings without a master’s consent, and running away. Indeed, a slave was not permitted off his master’s farm or business without his owner’s permission. In rural areas, a slave was required to carry a written pass to leave the master’s land.

Southern states erected numerous punishments for slave crimes, including prison terms, banishment, whipping, castration, and execution. In most states, the criminal law for slaves (and blacks generally) was noticeably harsher than for free whites; in others, slave law as practiced resembled that governing poorer white citizens. Particularly harsh punishments applied to slaves who had allegedly killed their masters or who had committed rebellious acts. Southerners considered these acts of treason and resorted to immolation, drawing and quartering, and hanging.

MARKETS AND PRICES

Market prices for slaves reflect their substantial economic value. Scholars have gathered slave prices from a variety of sources, including censuses, probate records, plantation and slave-trader accounts, and proceedings of slave auctions. These data sets reveal that prime field hands went for four to six hundred dollars in the U.S. in 1800, thirteen to fifteen hundred dollars in 1850, and up to three thousand dollars just before Fort Sumter fell. Even controlling for inflation, the prices of U.S. slaves rose significantly in the six decades before South Carolina seceded from the Union. By 1860, Southerners owned close to $4 billion worth of slaves. Slavery remained a thriving business on the eve of the Civil War: Fogel and Engerman (1974) projected that by 1890 slave prices would have increased on average more than 50 percent over their 1860 levels. No wonder the South rose in armed resistance to protect its enormous investment.

Slave markets existed across the antebellum U.S. South. Even today, one can find stone markers like the one next to the Antietam battlefield, which reads: “From 1800 to 1865 This Stone Was Used as a Slave Auction Block. It has been a famous landmark at this original location for over 150 years.” Private auctions, estate sales, and professional traders facilitated easy exchange. Established dealers like Franklin and Armfield in Virginia, Woolfolk, Saunders, and Overly in Maryland, and Nathan Bedford Forrest in Tennessee prospered alongside itinerant traders who operated in a few counties, buying slaves for cash from their owners, then moving them overland in coffles to the lower South. Over a million slaves were taken across state lines between 1790 and 1860 with many more moving within states. Some of these slaves went with their owners; many were sold to new owners. In his monumental study, Michael Tadman (1989) found that slaves who lived in the upper South faced a very real chance of being sold for profit. From 1820 to 1860, he estimated that an average of 200,000 slaves per decade moved from the upper to the lower South, most via sales. A contemporary newspaper, The Virginia Times, calculated that 40,000 slaves were sold in the year 1830.

Determinants of Slave Prices

The prices paid for slaves reflected two economic factors: the characteristics of the slave and the conditions of the market. Important individual features included age, sex, childbearing capacity (for females), physical condition, temperament, and skill level. In addition, the supply of slaves, demand for products produced by slaves, and seasonal factors helped determine market conditions and therefore prices.

Age and Price

Prices for both male and female slaves tended to follow similar life-cycle patterns. In the U.S. South, infant slaves sold for a positive price because masters expected them to live long enough to make the initial costs of raising them worthwhile. Prices rose through puberty as productivity and experience increased. In nineteenth-century New Orleans, for example, prices peaked at about age 22 for females and age 25 for males. Girls cost more than boys up to their mid-teens. The genders then switched places in terms of value. In the Old South, boys aged 14 sold for 71 percent of the price of 27-year-old men, whereas girls aged 14 sold for 65 percent of the price of 27-year-old men. After the peak age, prices declined slowly for a time, then fell off rapidly as the aging process caused productivity to fall. Compared to full-grown men, women were worth 80 to 90 percent as much. One characteristic in particular set some females apart: their ability to bear children. Fertile females commanded a premium. The mother-child link also proved important for pricing in a different way: people sometimes paid more for intact families.

Source: Fogel and Engerman (1974)

Other Characteristics and Price

Skills, physical traits, mental capabilities, and other qualities also helped determine a slave’s price. Skilled workers sold for premiums of 40-55 percent whereas crippled and chronically ill slaves sold for deep discounts. Slaves who proved troublesome — runaways, thieves, layabouts, drunks, slow learners, and the like — also sold for lower prices. Taller slaves cost more, perhaps because height acts as a proxy for healthiness. In New Orleans, light-skinned females (who were often used as concubines) sold for a 5 percent premium.

Fluctuations in Supply

Prices for slaves fluctuated with market conditions as well as with individual characteristics. U.S. slave prices fell around 1800 as the Haitian revolution sparked the movement of slaves into the Southern states. Less than a decade later, slave prices climbed when the international slave trade was banned, cutting off legal external supplies. Interestingly enough, among those who supported the closing of the trans-Atlantic slave trade were several Southern slaveowners. Why this apparent anomaly? Because the resulting reduction in supply drove up the prices of slaves already living in the U.S and, hence, their masters’ wealth. U.S. slaves had high enough fertility rates and low enough mortality rates to reproduce themselves, so Southern slaveowners did not worry about having too few slaves to go around.

Fluctuations in Demand

Demand helped determine prices as well. The demand for slaves derived in part from the demand for the commodities and services that slaves provided. Changes in slave occupations and variability in prices for slave-produced goods therefore created movements in slave prices. As slaves replaced increasingly expensive indentured servants in the New World, their prices went up. In the period 1748 to 1775, slave prices in British America rose nearly 30 percent. As cotton prices fell in the 1840s, Southern slave prices also fell. But, as the demand for cotton and tobacco grew after about 1850, the prices of slaves increased as well.

Interregional Price Differences

Differences in demand across regions led to transitional regional price differences, which in turn meant large movements of slaves. Yet because planters experienced greater stability among their workforce when entire plantations moved, 84 percent of slaves were taken to the lower South in this way rather than being sold piecemeal.

Time of Year and Price

Demand sometimes had to do with the time of year a sale took place. For example, slave prices in the New Orleans market were 10 to 20 percent higher in January than in September. Why? September was a busy time of year for plantation owners: the opportunity cost of their time was relatively high. Prices had to be relatively low for them to be willing to travel to New Orleans during harvest time.

Expectations and Prices

One additional demand factor loomed large in determining slave prices: the expectation of continued legal slavery. As the American Civil War progressed, prices dropped dramatically because people could not be sure that slavery would survive. In New Orleans, prime male slaves sold on average for $1381 in 1861 and for $1116 in 1862. Burgeoning inflation meant that real prices fell considerably more. By war’s end, slaves sold for a small fraction of their 1860 price.

Source: Data supplied by Stanley Engerman and reported in Walton and Rockoff (1994).

PROFITABILITY, EFFICIENCY, AND EXPLOITATION

That slavery was profitable seems almost obvious. Yet scholars have argued furiously about this matter. On one side stand antebellum writers such as Hinton Rowan Helper and Frederick Law Olmstead, many antebellum abolitionists, and contemporary scholars like Eugene Genovese (at least in his early writings), who speculated that American slavery was unprofitable, inefficient, and incompatible with urban life. On the other side are scholars who have marshaled masses of data to support their contention that Southern slavery was profitable and efficient relative to free labor and that slavery suited cities as well as farms. These researchers stress the similarity between slave markets and markets for other sorts of capital.

Consensus That Slavery Was Profitable

This battle has largely been won by those who claim that New World slavery was profitable. Much like other businessmen, New World slaveowners responded to market signals — adjusting crop mixes, reallocating slaves to more profitable tasks, hiring out idle slaves, and selling slaves for profit. One well-known instance shows that contemporaneous free labor thought that urban slavery may even have worked too well: employees of the Tredegar Iron Works in Richmond, Virginia, went out on their first strike in 1847 to protest the use of slave labor at the Works.

Fogel and Engerman’s Time on the Cross

Carrying the banner of the “slavery was profitable” camp is Nobel laureate Robert Fogel. Perhaps the most controversial book ever written about American slavery is Time on the Cross, published in 1974 by Fogel and co-author Stanley Engerman. These men were among the first to use modern statistical methods, computers, and large datasets to answer a series of empirical questions about the economics of slavery. To find profit levels and rates of return, they built upon the work of Alfred Conrad and John Meyer, who in 1958 had calculated similar measures from data on cotton prices, physical yield per slave, demographic characteristics of slaves (including expected lifespan), maintenance and supervisory costs, and (in the case of females) number of children. To estimate the relative efficiency of farms, Fogel and Engerman devised an index of “total factor productivity,” which measured the output per average unit of input on each type of farm. They included in this index controls for quality of livestock and land and for age and sex composition of the workforce, as well as amounts of output, labor, land, and capital

Time on the Cross generated praise — and considerable criticism. A major critique appeared in 1976 as a collection of articles entitled Reckoning with Slavery. Although some contributors took umbrage at the tone of the book and denied that it broke new ground, others focused on flawed and insufficient data and inappropriate inferences. Despite its shortcomings, Time on the Cross inarguably brought people’s attention to a new way of viewing slavery. The book also served as a catalyst for much subsequent research. Even Eugene Genovese, long an ardent proponent of the belief that Southern planters had held slaves for their prestige value, finally acknowledged that slavery was probably a profitable enterprise. Fogel himself refined and expanded his views in a 1989 book, Without Consent or Contract.

Efficiency Estimates

Fogel’s and Engerman’s research led them to conclude that investments in slaves generated high rates of return, masters held slaves for profit motives rather than for prestige, and slavery thrived in cities and rural areas alike. They also found that antebellum Southern farms were 35 percent more efficient overall than Northern ones and that slave farms in the New South were 53 percent more efficient than free farms in either North or South. This would mean that a slave farm that is otherwise identical to a free farm (in terms of the amount of land, livestock, machinery and labor used) would produce output worth 53 percent more than the free. On the eve of the Civil War, slavery flourished in the South and generated a rate of economic growth comparable to that of many European countries, according to Fogel and Engerman. They also discovered that, because slaves constituted a considerable portion of individual wealth, masters fed and treated their slaves reasonably well. Although some evidence indicates that infant and young slaves suffered much worse conditions than their freeborn counterparts, teenaged and adult slaves lived in conditions similar to — sometimes better than — those enjoyed by many free laborers of the same period.

Transition from Indentured Servitude to Slavery

One potent piece of evidence supporting the notion that slavery provides pecuniary benefits is this: slavery replaces other labor when it becomes relatively cheaper. In the early U.S. colonies, for example, indentured servitude was common. As the demand for skilled servants (and therefore their wages) rose in England, the cost of indentured servants went up in the colonies. At the same time, second-generation slaves became more productive than their forebears because they spoke English and did not have to adjust to life in a strange new world. Consequently, the balance of labor shifted away from indentured servitude and toward slavery.

Gang System

The value of slaves arose in part from the value of labor generally in the antebellum U.S. Scarce factors of production command economic rent, and labor was by far the scarcest available input in America. Moreover, a large proportion of the reward to owning and working slaves resulted from innovative labor practices. Certainly, the use of the “gang” system in agriculture contributed to profits in the antebellum period. In the gang system, groups of slaves perfomed synchronized tasks under the watchful overseer’s eye, much like parts of a single machine. Masters found that treating people like machinery paid off handsomely.

Antebellum slaveowners experimented with a variety of other methods to increase productivity. They developed an elaborate system of “hand ratings” in order to improve the match between the slave worker and the job. Hand ratings categorized slaves by age and sex and rated their productivity relative to that of a prime male field hand. Masters also capitalized on the native intelligence of slaves by using them as agents to receive goods, keep books, and the like.

Use of Positive Incentives

Masters offered positive incentives to make slaves work more efficiently. Slaves often had Sundays off. Slaves could sometimes earn bonuses in cash or in kind, or quit early if they finished tasks quickly. Some masters allowed slaves to keep part of the harvest or to work their own small plots. In places, slaves could even sell their own crops. To prevent stealing, however, many masters limited the products that slaves could raise and sell, confining them to corn or brown cotton, for example. In antebellum Louisiana, slaves even had under their control a sum of money called a peculium. This served as a sort of working capital, enabling slaves to establish thriving businesses that often benefited their masters as well. Yet these practices may have helped lead to the downfall of slavery, for they gave slaves a taste of freedom that left them longing for more.

Slave Families

Masters profited from reproduction as well as production. Southern planters encouraged slaves to have large families because U.S. slaves lived long enough — unlike those elsewhere in the New World — to generate more revenue than cost over their lifetimes. But researchers have found little evidence of slave breeding; instead, masters encouraged slaves to live in nuclear or extended families for stability. Lest one think sentimentality triumphed on the Southern plantation, one need only recall the willingness of most masters to sell if the bottom line was attractive enough.

Profitability and African Heritage

One element that contributed to the profitability of New World slavery was the African heritage of slaves. Africans, more than indigenous Americans, were accustomed to the discipline of agricultural practices and knew metalworking. Some scholars surmise that Africans, relative to Europeans, could better withstand tropical diseases and, unlike Native Americans, also had some exposure to the European disease pool.

Ease of Identifying Slaves

Perhaps the most distinctive feature of Africans, however, was their skin color. Because they looked different from their masters, their movements were easy to monitor. Denying slaves education, property ownership, contractual rights, and other things enjoyed by those in power was simple: one needed only to look at people to ascertain their likely status. Using color was a low-cost way of distinguishing slaves from free persons. For this reason, the colonial practices that freed slaves who converted to Christianity quickly faded away. Deciphering true religious beliefs is far more difficult than establishing skin color. Other slave societies have used distinguishing marks like brands or long hair to denote slaves, yet color is far more immutable and therefore better as a cheap way of keeping slaves separate. Skin color, of course, can also serve as a racist identifying mark even after slavery itself disappears.

Profit Estimates

Slavery never generated superprofits, because people always had the option of putting their money elsewhere. Nevertheless, investment in slaves offered a rate of return — about 10 percent — that was comparable to returns on other assets. Slaveowners were not the only ones to reap rewards, however. So too did cotton consumers who enjoyed low prices and Northern entrepreneurs who helped finance plantation operations.

Exploitation Estimates

So slavery was profitable; was it an efficient way of organizing the workforce? On this question, considerable controversy remains. Slavery might well have profited masters, but only because they exploited their chattel. What is more, slavery could have locked people into a method of production and way of life that might later have proven burdensome.

Fogel and Engerman (1974) claimed that slaves kept about ninety percent of what they produced. Because these scholars also found that agricultural slavery produced relatively more output for a given set of inputs, they argued that slaves may actually have shared in the overall material benefits resulting from the gang system. Other scholars contend that slaves in fact kept less than half of what they produced and that slavery, while profitable, certainly was not efficient. On the whole, current estimates suggest that the typical slave received only about fifty percent of the extra output that he or she produced.

Did Slavery Retard Southern Economic Development?

Gavin Wright (1978) called attention as well to the difference between the short run and the long run. He noted that slaves accounted for a very large proportion of most masters’ portfolios of assets. Although slavery might have seemed an efficient means of production at a point in time, it tied masters to a certain system of labor which might not have adapted quickly to changed economic circumstances. This argument has some merit. Although the South’s growth rate compared favorably with that of the North in the antebellum period, a considerable portion of wealth was held in the hands of planters. Consequently, commercial and service industries lagged in the South. The region also had far less rail transportation than the North. Yet many plantations used the most advanced technologies of the day, and certain innovative commercial and insurance practices appeared first in transactions involving slaves. What is more, although the South fell behind the North and Great Britain in its level of manufacturing, it compared favorably to other advanced countries of the time. In sum, no clear consensus emerges as to whether the antebellum South created a standard of living comparable to that of the North or, if it did, whether it could have sustained it.

Ultimately, the South’s system of law, politics, business, and social customs strengthened the shackles of slavery and reinforced racial stereotyping. As such, it was undeniably evil. Yet, because slaves constituted valuable property, their masters had ample incentives to take care of them. And, by protecting the property rights of masters, slave law necessarily sheltered the persons embodied within. In a sense, the apologists for slavery were right: slaves sometimes fared better than free persons because powerful people had a stake in their well-being.

Conclusion: Slavery Cannot Be Seen As Benign

But slavery cannot be thought of as benign. In terms of material conditions, diet, and treatment, Southern slaves may have fared as well in many ways as the poorest class of free citizens. Yet the root of slavery is coercion. By its very nature, slavery involves involuntary transactions. Slaves are property, whereas free laborers are persons who make choices (at times constrained, of course) about the sort of work they do and the number of hours they work.

The behavior of former slaves after abolition clearly reveals that they cared strongly about the manner of their work and valued their non-work time more highly than masters did. Even the most benevolent former masters in the U.S. South found it impossible to entice their former chattels back into gang work, even with large wage premiums. Nor could they persuade women back into the labor force: many female ex-slaves simply chose to stay at home. In the end, perhaps slavery is an economic phenomenon only because slave societies fail to account for the incalculable costs borne by the slaves themselves.

REFERENCES AND FURTHER READING

For studies pertaining to the economics of slavery, see particularly Aitken, Hugh, editor. Did Slavery Pay? Readings in the Economics of Black Slavery in the United States. Boston: Houghton-Mifflin, 1971.

For accounts of slave trading and sales, see
Bancroft, Frederic. Slave Trading in the Old South. New York: Ungar, 1931. Tadman, Michael. Speculators and Slaves. Madison: University of Wisconsin Press, 1989.

For discussion of the profession of slave catchers, see
Campbell, Stanley W. The Slave Catchers. Chapel Hill: University of North Carolina Press, 1968.

To read about slaves in industry and urban areas, see
Dew, Charles B. Slavery in the Antebellum Southern Industries. Bethesda: University Publications of America, 1991.

Goldin, Claudia D. Urban Slavery in the American South, 1820-1860: A Quantitative History. Chicago: University of Chicago Press,1976.

Starobin, Robert. Industrial Slavery in the Old South. New York: Oxford University Press, 1970.

For discussions of masters and overseers, see
Oakes, James. The Ruling Race: A History of American Slaveholders. New York: Knopf, 1982.

Roark, James L. Masters Without Slaves. New York: Norton, 1977.

Scarborough, William K. The Overseer: Plantation Management in the Old South. Baton Rouge, Louisiana State University Press, 1966.

On indentured servitude, see
Galenson, David. “Rise and Fall of Indentured Servitude in the Americas: An Economic Analysis.” Journal of Economic History 44 (1984): 1-26.

On slave law, see
Fede, Andrew. “Legal Protection for Slave Buyers in the U.S. South.” American Journal of Legal History 31 (1987). Finkelman, Paul. An Imperfect Union: Slavery, Federalism, and Comity. Chapel Hill: University of North Carolina, 1981.

Walton, Gary, and Hugh Rockoff. History of the American Economy. Orlando: Harcourt Brace, 1994, chapter 13.

Whaples, Robert. “Where Is There Consensus among American Economic Historians?” Journal of Economic History 55 (1995): 139-154.

Data can be found at
U.S. Bureau of the Census, Historical Statistics of the United States, 1970, collected in ICPSR study number 0003, “Historical Demographic, Economic and Social Data: The United States, 1790-1970,” located at http://fisher.lib.virginia.edu/census/.

Zephyr Frank, Stanford University and Aldo Musacchio, Ibmec SãoPaulo

Overview of the Rubber Market, 1870-1930

Natural rubber was first used by the indigenous peoples of the Amazon basin for a variety of purposes. By the middle of the eighteenth century, Europeans had begun to experiment with rubber as a waterproofing agent. In the early nineteenth century, rubber was used to make waterproof shoes (Dean, 1987). The best source of latex, the milky fluid from which natural rubber products were made, was hevea brasiliensis, which grew predominantly in the Brazilian Amazon (but also in the Amazonian regions of Bolivia and Peru). Thus, by geographical accident, the first period of rubber’s commercial history, from the late 1700s through 1900, was centered in Brazil; the second period, from roughly 1910 on, was increasingly centered in East Asia as the result of plantation development. The first century of rubber was typified by relatively low levels of production, high wages, and very high prices; the period following 1910 was one of rapidly increasing production, low wages, and falling prices.

Uses of Rubber

The early uses of the material were quite limited. Initially the problem of natural rubber was its sensitivity to temperature changes, which altered its shape and consistency. In 1839 Charles Goodyear improved the process called vulcanization, which modified rubber so that it would support extreme temperatures. It was then that natural rubber became suitable for producing hoses, tires, industrial bands, sheets, shoes, shoe soles, and other products. What initially caused the beginning of the “Rubber Boom,” however, was the popularization of the bicycle. The boom would then be accentuated after 1900 by the development of the automobile industry and the expansion of the tire industry to produce car tires (Weinstein, 1983; Dean 1987).

Brazil’s Initial Advantage and High-Wage Cost Structure

Until the turn of the twentieth century Brazil and the countries that share the Amazon basin (i.e. Bolivia, Venezuela and Peru), were the only exporters of natural rubber. Brazil sold almost ninety percent of the total rubber commercialized in the world. The fundamental fact that explains Brazil’s entry into and domination of natural rubber production during the period 1870 through roughly 1913 is that most of the world’s rubber trees grew naturally in the Amazon region of Brazil. The Brazilian rubber industry developed a high-wage cost structure as the result of labor scarcity and lack of competition in the early years of rubber production. Since there were no credit markets to finance the trips of the workers of other parts of Brazil to the Amazon, workers paid their trips with loans from their future employers. Much like indenture servitude during colonial times in the United States, these loans were paid back to the employers with work once the laborers were established in the Amazon basin. Another factor that increased the costs of producing rubber was that most provisions for tappers in the field had to be shipped in from outside the region at great expense (Barham and Coomes, 1994). This made Brazilian production very expensive compared to the future plantations in Asia. Nevertheless Brazil’s system of production worked well as long as two conditions were met: first, that the demand for rubber did not grow too quickly, for wild rubber production could not expand rapidly owing to labor and environmental constraints; second, that competition based on some other more efficient arrangement of factors of production did not exist. As can be seen in Figure 1, Brazil dominated the natural rubber market until the first decade of the twentieth century.

Between 1900 and 1913, these conditions ceased to hold. First, the demand for rubber skyrocketed [see Figure 2], providing a huge incentive for other producers to enter the market. Prices had been high before, but Brazilian supply had been quite capable of meeting demand; now, prices were high and demand appeared insatiable. Plantations, which had been possible since the 1880s, now became a reality mainly in the colonies of Southeast Asia. Because Brazil was committed to a high-wage, labor-scarce production regime, it was unable to counter the entry of Asian plantations into the market it had dominated for half a century.

In Asia, the British and Dutch drew upon their superior stocks of capital and vast pools of cheap colonial labor to transform rubber collection into a low-cost, labor-intensive industry. Investment per tapper in Brazil was reportedly 337 pounds sterling circa 1910; in the low-cost Asian plantations, investment was estimated at just 210 pounds per worker (Dean, 1987). Not only were Southeast Asian tappers cheaper, they were potentially eighty percent more productive (Dean, 1987).

Ironically, the new plantation system proved equally susceptible to uncertainty and competition. Unexpected sources of uncertainty arose in the technological development of automobile tires. In spite of colonialism, the British and Dutch were unable to collude to control production and prices plummeted after 1910. When the British did attempt to restrict production in the 1920s, the United States attempted to set up plantations in Brazil and the Dutch were happy to take market share. Yet it was too late for Brazil: the cost structure of Southeast Asian plantations could not be matched. In a sense, then, the game was no longer worth the candle: in order to compete in rubber production, Brazil would have to have had significantly lower wages — which would only have been possible with a vastly expanded transport network and domestic agriculture sector in the hinterland of the Amazon basin. Such an expensive solution made no economic sense in the 1910s and 20s when coffee and nascent industrialization in São Paulo offered much more promising prospects.

Natural Rubber Extraction and Commercialization: Brazil

Rubber Tapping in the Amazon Rainforest

One disadvantage Brazilian rubber producers suffered was that the organization of production depended on the distribution of Hevea brasiliensis trees in the forest. The owner (or often lease concessionary) of a large land plot would hire tappers to gather rubber by gouging the tree trunk with an axe. In Brazil, the usual practice was to make a big dent in the tree and put a small bowl to collect the latex that would come out of the trunk. Typically, tappers had two “rows” of trees they worked on, alternating one row per day. The “rows” contained several circular roads that went through the forest with more than 100 trees each. Rubber could only be collected during the tapping season (August to January), and the living conditions of tappers were hard. As the need for rubber expanded, tappers had to be sent deep into the Amazon rainforest to look for unexplored land with more productive trees. Tappers established their shacks close to the river because rubber, once smoked, was sent by boat to Manaus (capital of the state of Amazonas) or to Belém (capital of the state of Pará), both entrepots for rubber exporting to Europe and the US.[1]

Competition or Exploitation? Tappers and Seringalistas

After collecting the rubber, tappers would go back to their shacks and smoke the resin in order to make balls of partially filtered and purified rough rubber that could be sold at the ports. There is much discussion about the commercialization of the product. Weinstein (1983) argues that the seringalista — the employer of the rubber tapper — controlled the transportation of rubber to the ports, where he sold the rubber, many times in exchange for goods that could be sold (with a large gain) back to the tapper. In this economy money was scarce and the “wages” of tappers or seringueiros were determined by the price of rubber. Wages depended on the current price of rubber; the usual agreement for tappers was to split the gross profits with their patrons. These salaries were most commonly paid in goods, such as cigarettes, food, and tools. According to Weinstein (1983), the goods were overpriced by the seringalistas to extract larger profits from the seringueiros work. Barham and Coomes (1994), on the other hand, argue that the structure of the market in the Amazon was less closed and that independent traders would travel around the basin in small boats, willing to exchange goods for rubber. Poor monitoring by employers and an absent state facilitated these under-the-counter transactions, which allowed tappers to get better pay for their work.

Exporting Rubber

From the ports, rubber was in the hands of mainly Brazilian, British and American exporters. Contrary to what Weinstein (1983) argued, Brazilian producers or local merchants from the interior could choose whether to send the rubber on consignment to a New York commission house, rather than selling it to a exporter in the Amazon (Shelley, 1918). Rubber was taken, like other commodities, to ports in Europe and the US to be distributed to the industries that bought large amounts of the product in the London or New York commodities exchanges. A large part of rubber produced was traded at these exchanges, but tire manufacturers and other large consumers also made direct purchases from the distributors in the country of origin.[2]

Rubber Production in Southeast Asia

Seeds Smuggled from Brazil to Britain

The Hevea brasiliensis, the most important type of rubber tree, was an Amazonian species. This is why the countries of the Amazon basin were the main producers of rubber at the beginning of the international rubber trade. How, then, did British and Dutch colonies in Southeast Asia end up dominating the market? Brazil tried to prevent Hevea brasiliensis seeds from being exported, as the Brazilian government knew that by being the main producers of rubber, profits from rubber trading were insured. Protecting property rights in seeds proved a futile exercise. In 1876, the Englishman and aspiring author and rubber expert, Henry Wickham, smuggled 70,000 seeds to London, a feat for which he earned Brazil’s eternal opprobrium and an English knighthood. After experimenting with the seeds, 2,800 plants were raised at the Royal Botanical Gardens in London (Kew Gardens) and then shipped to Perideniya Gardens in Ceylon. In 1877 a case of 22 plants reached Singapore and were planted at the Singapore Botanical Garden. In the same year the first plant arrived in the Malay States. Since rubber trees needed between 6 to 8 years to be mature enough to yield good rubber, tapping began in the 1880s.

Scientific Research to Maximize Yields

In order to develop rubber extraction in the Malay States, more scientific intervention was needed. In 1888, H. N. Ridley was appointed director of the Singapore Botanical Garden and began experimenting with tapping methods. The final result of all the experimentations with different methods of tapping in Southeast Asia was the discovery of how to extract rubber in such a way that the tree would maintain a high yield for a long period of time. Rather than making a deep gouge with an axe on the rubber tree, as in Brazil, Southeast Asian tappers scraped the trunk of the tree by making a series of overlapped Y-shaped cuts with an axe, such that at the bottom there would be a canal ending in a collecting receptacle. According to Akers (1912), the tapping techniques in Asia insured the exploitation of the trees for longer periods, because the Brazilian technique scarred the tree’s bark and lowered yields over time.

Rapid Commercial Development and the Automobile Boom

Commercial planting in the Malay States began in 1895. The development of large-scale plantations was slow because of the lack of capital. Investors did not get interested in plantations until the prospects for rubber improved radically with the spectacular development of the automobile industry. By 1905, European capitalists were sufficiently interested in investing in large-scale plantations in Southeast Asia to plant some 38,000 acres of trees. Between 1905 and 1911 the annual increase was over 70,000 acres per year, and, by the end of 1911, the acreage in the Malay States reached 542,877 (Baxendale, 1913). The expansion of plantations was possible because of the sophistication in the organization of such enterprises. Joint stock companies were created to exploit the land grants and capital was raised through stock issues on the London Stock Exchange. The high returns during the first years (1906-1910) made investors ever more optimistic and capital flowed in large amounts. Plantations depended on a very disciplined system of labor and an intensive use of land.

Malaysia’s Advantages over Brazil

In addition to the intensive use of land, the production system in Malaysia had several economic advantages over that of Brazil. First, in the Malay States there was no specific tapping season, unlike Brazil where the rain did not allow tappers to collect rubber during six months of the year. Second, health conditions were better on the plantations, where rubber companies typically provided basic medical care and built infirmaries. In Brazil, by contrast, yellow fever and malaria made survival harder for rubber tappers who were dispersed in the forest and without even rudimentary medical attention. Finally, better living conditions and the support of the British and Dutch colonial authorities helped to attract Indian labor to the rubber plantations. Japanese and Chinese labor also immigrated to the plantations in Southeast Asia in response to relatively high wages (Baxendale, 1913).

Initially, demand for rubber was associated with specialized industrial components (belts and gaskets, etc.), consumer goods (golf balls, shoe soles, galoshes, etc.), and bicycle tires. Prior to the development of the automobile as a mass-marketed phenomenon, the Brazilian wild rubber industry was capable of meeting world demand and, furthermore, it was impossible for rubber producers to predict the scope and growth of the automobile industry prior to the 1900s. Thus, as Figure 3 indicates, growth in demand, as measured by U.K. imports, was not particularly rapid in the period 1880-1899. There was no reason to believe, in the early 1880s, that demand for rubber would explode as it did in the 1890s. Even as demand rose in the 1890s with the bicycle craze, the rate of increase was not beyond the capacity of wild rubber producers in Brazil and elsewhere (see figure 3). High rubber prices did not induce rapid increases in production or plantation development in the nineteenth century. In this context, Brazil developed a reasonably efficient industry based on its natural resource endowment and limited labor and capital sources.

In the first three decades of the twentieth century, major changes in both supply and demand created unprecedented uncertainty in rubber markets. On the supply side, Southeast Asian rubber plantations transformed the cost structure and capacity of the industry. On the demand side, and directly inducing plantation development, automobile production and associated demand for rubber exploded. Then, in the 1920s, competition and technological advance in tire production led to another shift in the market with profound consequences for rubber producers and tire manufacturers alike.

Rapid Price Fluctuations and Output Lags

Figure 1 shows the fluctuations of the Rubber Smoked Sheet type 1 (RSS1) price in London on an annual basis. The movements from 1906 to 1910 were very volatile on a monthly basis, as well, thus complicating forecasts for producers and making it hard for producers to decide how to react to market signals. Even though the information of prices and amounts in the markets were published every month in the major rubber journals, producers did not have a good idea of what was going to happen in the long run. If prices were high today, then they wanted to expand the area planted, but since it took from 6 to 8 years for trees to yield good rubber, they would have to wait to see the result of the expansion in production many years and price swings later. Since many producers reacted in the same way, periods of overproduction of rubber six to eight -odd years after a price rise were common.[3] Overproduction meant low prices, but since investments were mostly sunk (the costs of preparing the land, planting the trees and bringing in the workers could not be recovered and these resources could not be easily shifted to other uses), the market tended to stay oversupplied for long periods of time.

In figure 1 we see the annual price of Malaysian rubber plotted over time.

The years 1905 and 1906 marked historic highs for rubber prices, only to be surpassed briefly in 1909 and 1910. The area planted in rubber throughout Asia grew from 15,000 acres in 1901 to 433,000 acres in 1907; these plantings matured circa 1913, and cultivated rubber surpassed Brazilian wild rubber in volume exported.[4] The growth of the Asian rubber industry soon swamped Brazil’s market share and drove prices well below pre-Boom levels. After the major peak in prices of 1910, prices plummeted and followed a downward trend throughout the 1920s. By 1921, the bottom had dropped out of the market, and Malaysian rubber producers were induced by the British colonial authorities to enter into a scheme to restrict production. Plantations received export coupons that set quotas that limited the supply of rubber. The shortage of rubber did not affect prices until 1924 when the consumption passed the production of rubber and prices started to rise rapidly. This scheme had a short success because competition from the Dutch plantations in southeast Asia and others drove prices down by 1926. The plan was officially ended in 1928.[5]

Automobiles’ Impact on Rubber Demand

In order to understand the boom in rubber production, it is fundamental to look at the automobile industry. Cars had originally been adapted from horse-drawn carriages; some ran on wooden wheels, some on metal, some shod as it were in solid rubber. In any case, the ride at the speeds cars were soon capable of was impossible to bear. The pneumatic tire was quickly adopted from the bicycle, and the automobile tire industry was born — soon to account for well over half of rubber company sales in the United States where the vast majority of automobiles were manufactured in the early years of the industry.[6] The amount of rubber required to satisfy demand for automobile tires led first to a spike in rubber prices; second, it led to the development of rubber plantations in Asia.[7]

The connection between automobiles, plantations, and the rubber tire industry was explicit and obvious to observers at the time. Harvey Firestone, son of the founder of the company, put it this way:

It was not until 1898 that any serious attention was paid to plantation development. Then came the automobile, and with it the awakening on the part of everybody that without rubber there could be no tires, and without tires there could be no automobiles. (Firestone, 1932, p. 41)

Thus the emergence of a strong consuming sector linked to the automobile was necessary. For instance, the average price of rubber from 1880-1884 was 401 pounds sterling per ton; from 1900 to 1904, when the first plantations were beginning to be set up, the average price was 459 pounds sterling per ton. Thus, Asian plantations were developed both in response to high rubber prices and to what everyone could see was an exponentially growing source of demand in automobiles. Previous consumers of rubber did not show the kind of dynamism needed to spur entry by plantations into the natural rubber market, even though prices were very high throughout most of second half of the nineteenth century.

Producers Need to Forecast Future Supply and Demand Conditions

Rubber producers made decisions about production and planting during the period 1900-1912 with the aim to reap windfall profits, instead of thinking about the long-run sustainability of their business. High prices were an incentive for all to increase production, but increasing production, through more acreage planted could mean a loss for everyone in the future (because too much supply could drive the prices down). Yet, current prices could not yield profits when investment decisions had to be made six or more years in advance, as was the case in plantation production: in order to invest in plantations, capital had to be able to predict future interactions in supply and demand. Demand, although high and apparently relatively price inelastic, was not entirely predictable. It was predictable enough, however, for planters to expand acreage in rubber in Asia at a dramatic rate. Planters were often uncertain as to the aggregate level of supply: new plantations were constantly coming into production; others were entering into decline or bankruptcy. Thus their investments could yield a lot in the short run, but if all the people reacted in the same way, prices were driven down and profits were low too. This is what happened in the 1920s, after all the acreage expansion of the first two decades of the century.

Demand Growth Unexpectedly Slows in the 1920s

Plantings between 1912 and 1916 were destined to come into production during a period in which growth in the automobile industry leveled off significantly owing to recession in 1920-21. Making maters worse for rubber producers, major advances in tire technology further controlled demand — for example, the change from corded to balloon tires increased average tire tread mileage from 8,000 to 15,000 miles.[8] The shift from corded to balloon tires decreased demand for natural rubber even as the automobile industry recovered from recession in the early 1920s. In addition, better design of tire casings circa 1920 led to the growth of the retreading industry, the result of which was further saving on rubber. Finally, better techniques in cotton weaving lowered friction and heat and further extended tire life.[9] As rubber supplies increased and demand decreased and became more price inelastic, prices plummeted: neither demand nor price proved predictable over the long run and suppliers paid a stiff price for overextending themselves during the boom years. Rubber tire manufacturers suffered the same fate: competition and technology (which they themselves introduced) pushed prices downward and, at the same time, flattened demand (Allen, 1936).[10]

Now, if one looks at the price of rubber and the rate of growth in demand as measured by imports in the 1920s, it is clear that the industry was over-invested in capacity. The consequences of technological change were dramatic for tire manufacturer profits as well as for rubber producers.

Conclusion

The natural rubber trade underwent several radical transformations over the period 1870 to 1930. First, prior to 1910, it was associated with high costs of production and high prices for final goods; most rubber was produced, during this period, by tapping rubber trees in the Amazon region of Brazil. After 1900, and especially after 1910, rubber was increasingly produced on low-cost plantations in Southeast Asia. The price of rubber fell with plantation development and, at the same time, the volume of rubber demanded by car tire manufacturers expanded dramatically. Uncertainty, in terms of both supply and demand, (often driven by changing tire technology) meant that natural rubber producers and tire manufacturers both experienced great volatility in returns. The overall evolution of the natural rubber trade and the related tire manufacture industry was toward large volume, low-cost production in an internationally competitive environment marked by commodity price volatility and declining levels of profit as the industry matured.

[1] Rubber taping in the Amazon basin is described in Weinstein (1983), Barham and Coomes (1994), Stanfield (1998), and in several articles published in India Rubber World, the main journal on rubber trading. See, for example, the explanation of tapping in the October 1, 1910 issue, or “The Present and Future of the Native Havea Rubber Industry” in the January 1, 1913 issue. For a detailed analysis of the rubber industry by region in Brazil by contemporary observers, see Schurz et al (1925).

[2] Newspapers such as The Economist or the London Times included sections on rubber trading, such as weekly or monthly reports of the market conditions, prices and other information. For the dealings between tire manufacturers and distributors in Brazil and Malaysia see Firestone (1932).

[3] Using cross-correlations of production and prices, we found that changes in production at time t were correlated with price changes in t-6 and t-8 (years). This is only weak evidence because these correlations are not statistically significant.

[4] Drabble (1973), 213, 220. The expansion in acreage was accompanied by a boom in company formation.

[5] Drabble (1973), 192-199. This was the so-called Stevenson Committee restriction, which lasted from 1922 to 1926. This plan basically limited the amount of rubber each planter could export assigning quotas through coupons.

[6] Pneumatic tires were first adapted to automobiles in 1896; Dunlop’s pneumatic bicycle tire was introduced in 1888. The great advantage of these tires over solid rubber was that they generated far less friction, extending tread life, and, of course, cushioned the ride and allowed for higher speeds.

[7] Early histories of the rubber industry tended to blame Brazilian “monopolists” for holding up supply and reaping windfall profits, see, e.g., Allen (1936), 116-117. In fact, rubber production in Brazil was far from monopolistic; other reasons account for supply inelasticity.

Donald Frey, Wake Forest University

German sociologist Max Weber (1864 -1920) developed the Protestant-ethic thesis in two journal articles published in 1904-05. The English translation appeared in book form as The Protestant Ethic and the Spirit of Capitalism in 1930. Weber argued that Reformed (i.e., Calvinist) Protestantism was the seedbed of character traits and values that under-girded modern capitalism. This article summarizes Weber’s formulation, considers criticisms of Weber’s thesis, and reviews evidence of linkages between cultural values and economic growth.

Outline of Weber’s Thesis

Weber emphasized that money making as a calling had been “contrary to the ethical feelings of whole epochs…” (Weber 1930, p.73; further Weber references by page number alone). Lacking moral support in pre-Protestant societies, business had been strictly limited to “the traditional manner of life, the traditional rate of profit, the traditional amount of work…” (67). Yet, this pattern “was suddenly destroyed, and often entirely without any essential change in the form of organization…” Calvinism, Weber argued, changed the spirit of capitalism, transforming it into a rational and unashamed pursuit of profit for its own sake.

In an era when religion dominated all of life, Martin Luther’s (1483-1546) insistence that salvation was by God’s grace through faith had placed all vocations on the same plane. Contrary to medieval belief, religious vocations were no longer considered superior to economic vocations for only personal faith mattered with God. Nevertheless, Luther did not push this potential revolution further because he clung to a traditional, static view of economic life. John Calvin (1509-1564), or more accurately Calvinism, changed that.

Calvinism accomplished this transformation, not so much by its direct teachings, but (according to Weber) by the interaction of its core theology with human psychology. Calvin had pushed the doctrine of God’s grace to the limits of the definition: grace is a free gift, something that the Giver, by definition, must be free to bestow or withhold. Under this definition, sacraments, good deeds, contrition, virtue, assent to doctrines, etc. could not influence God (104); for, if they could, that would turn grace into God’s side of a transaction instead its being a pure gift. Such absolute divine freedom, from mortal man’s perspective, however, seemed unfathomable and arbitrary (103). Thus, whether one was among those saved (the elect) became the urgent question for the average Reformed churchman according to Weber.

Uncertainty about salvation, according to Weber, had the psychological effect of producing a single-minded search for certainty. Although one could never influence God’s decision to extend or withhold election, one might still attempt to ascertain his or her status. A life that “… served to increase the glory of God” presumably flowed naturally from a state of election (114). If one glorified God and conformed to what was known of God’s requirements for this life then that might provide some evidence of election. Thus upright living, which could not earn salvation, returned as evidence of salvation.

The upshot was that the Calvinist’s living was “thoroughly rationalized in this world and dominated by the aim to add to the glory of God in earth…” (118). Such a life became a systematic living out of God’s revealed will. This singleness of purpose left no room for diversion and created what Weber called an ascetic character. “Not leisure and enjoyment, but only activity serves to increase the glory of God, according to the definite manifestations of His will” (157). Only in a calling does this focus find full expression. “A man without a calling thus lacks the systematic, methodical character which is… demanded by worldly asceticism” (161). A calling represented God’s will for that person in the economy and society.

Such emphasis on a calling was but a small step from a full-fledged capitalistic spirit. In practice, according to Weber, that small step was taken, for “the most important criterion [of a calling] is … profitableness. For if God … shows one of His elect a chance of profit, he must do it with a purpose…” (162). This “providential interpretation of profit-making justified the activities of the business man,” and led to “the highest ethical appreciation of the sober, middle-class, self-made man” (163).

A sense of calling and an ascetic ethic applied to laborers as well as to entrepreneurs and businessmen. Nascent capitalism required reliable, honest, and punctual labor (23-24), which in traditional societies had not existed (59-62). That free labor would voluntarily submit to the systematic discipline of work under capitalism required an internalized value system unlike any seen before (63). Calvinism provided this value system (178-79).

Weber’s “ascetic Protestantism” was an all-encompassing value system that shaped one’s whole life, not merely ethics on the job. Life was to be controlled the better to serve God. Impulse and those activities that encouraged impulse, such as sport or dance, were to be shunned. External finery and ornaments turned attention away from inner character and purpose; so the simpler life was better. Excess consumption and idleness were resources wasted that could otherwise glorify God. In short, the Protestant ethic ordered life according to its own logic, but also according to the needs of modern capitalism as understood by Weber.

An adequate summary requires several additional points. First, Weber virtually ignored the issue of usury or interest. This contrasts with some writers who take a church’s doctrine on usury to be the major indicator of its sympathy to capitalism. Second, Weber magnified the extent of his Protestant ethic by claiming to find Calvinist economic traits in later, otherwise non-Calvinist Protestant movements. He recalled the Methodist John Wesley’s (1703-1791) “Earn all you can, save all you can, give all you can,” and ascetic practices by followers of the eighteenth-century Moravian leader Nicholas Von Zinzendorf (1700-1760). Third, Weber thought that once established the spirit of modern capitalism could perpetuate its values without religion, citing Benjamin Franklin whose ethic already rested on utilitarian foundations. Fourth, Weber’s book showed little sympathy for either Calvinism, which he thought encouraged a “spiritual aristocracy of the predestined saints” (121), or capitalism , which he thought irrational for valuing profit for its own sake. Finally, although Weber’s thesis could be viewed as a rejoinder to Karl Marx (1818-1883), Weber claimed it was not his goal to replace Marx’s one-sided materialism with “an equally one-sided spiritualistic causal interpretation…” of capitalism (183).

Critiques of Weber

Critiques of Weber can be put into three categories. First, Weber might have been wrong about the facts: modern capitalism might have arisen before Reformed Protestantism or in places where the Reformed influence was much smaller than Weber believed. Second, Weber might have misinterpreted Calvinism or, more narrowly, Puritanism; if Reformed teachings were not what Weber supposed, then logically they might not have supported capitalism. Third, Weber might have overstated capitalism’s need for the ascetic practices produced by Reformed teachings.

On the first count, Weber has been criticized by many. During the early twentieth century, historians studied the timing of the emergence of capitalism and Calvinism in Europe. E. Fischoff (1944, 113) reviewed the literature and concluded that the “timing will show that Calvinism emerged later than capitalism where the latter became decisively powerful,” suggesting no cause-and-effect relationship. Roland Bainton also suggests that the Reformed contributed to the development of capitalism only as a “matter of circumstance” (Bainton 1952, 254). The Netherlands “had long been the mart of Christendom, before ever the Calvinists entered the land.” Finally, Kurt Samuelsson (1957) concedes that “the Protestant countries, and especially those adhering to the Reformed church, were particularly vigorous economically” (Samuelsson, 102). However, he finds much reason to discredit a cause-and-effect relationship. Sometimes capitalism preceded Calvinism (Netherlands), and sometimes lagged by too long a period to suggest causality (Switzerland). Sometimes Catholic countries (Belgium) developed about the same time as the Protestant countries. Even in America, capitalist New England was cancelled out by the South, which Samuelsson claims also shared a Puritan outlook.

Weber himself, perhaps seeking to circumvent such evidence, created a distinction between traditional capitalism and modern capitalism. The view that traditional capitalism could have existed first, but that Calvinism in some meaningful sense created modern capitalism, depends on too fine a distinction according to critics such as Samuelsson. Nevertheless, because of the impossibility of controlled experiments to firmly resolve the question, the issue will never be completely closed.

The second type of critique is that Weber misinterpreted Calvinism or Puritanism. British scholar R. H. Tawney in Religion and the Rise of Capitalism (1926) noted that Weber treated multi-faceted Reformed Christianity as though it were equivalent to late-era English Puritanism, the period from which Weber’s most telling quotes were drawn. Tawney observed that the “iron collectivism” of Calvin’s Geneva had evolved before Calvinism became harmonious with capitalism. “[Calvinism] had begun by being the very soul of authoritarian regimentation. It ended by being the vehicle of an almost Utilitarian individualism” (Tawney 1962, 226-7). Nevertheless, Tawney affirmed Weber’s point that Puritanism “braced [capitalism’s] energies and fortified its already vigorous temper.”

Roland Bainton in his own history of the Reformation disputed Weber’s psychological claims. Despite the psychological uncertainty Weber imputed to Puritans, their activism could be “not psychological and self-centered but theological and God-centered” (Bainton 1952, 252-53). That is, God ordered all of life and society, and Puritans felt obliged to act on His will. And if some Puritans scrutinized themselves for evidence of election, “the test was emphatically not economic activity as such but upright character…” He concludes that Calvinists had no particular affinity for capitalism but that they brought “vitality and drive into every area … whether they were subduing a continent, overthrowing a monarchy, or managing a business, or reforming the evils of the very order which they helped to create” (255).

Samuelsson, in a long section (27-48), argued that Puritan leaders did not truly endorse capitalistic behavior. Rather, they were ambivalent. Given that Puritan congregations were composed of businessmen and their families (who allied with Puritan churches because both wished for less royal control of society), the preachers could hardly condemn capitalism. Instead, they clarified “the moral conditions under which a prosperous, even wealthy, businessman may, despite success and wealth, become a good Christian” (38). But this, Samuelsson makes clear, was hardly a ringing endorsement of capitalism.

Criticisms that what Weber described as Puritanism was not true Puritanism, much less Calvinism, may be correct but beside the point. Puritan leaders indeed condemned exclusive devotion to one’s business because it excluded God and the common good. Thus, the Protestant ethic as described by Weber apparently would have been a deviation from pure doctrine. However, the pastors’ very attacks suggest that such a (mistaken) spirit did exist within their flocks. But such mistaken doctrine, if widespread enough, could still have contributed to the formation of the capitalist spirit.

Furthermore, any misinterpretation of Puritan orthodoxy was not entirely the fault of Puritan laypersons. Puritan theologians and preachers could place heavier emphasis on economic success and virtuous labor than critics such as Samuelsson would admit. The American preacher John Cotton (1582-1652) made clear that God “would have his best gifts improved to the best advantage.” The respected theologian William Ames (1576-1633) spoke of “taking and using rightly opportunity.” And, speaking of the idle, Cotton Mather said, “find employment for them, set them to work, and keep them at work…” A lesser standard would hardly apply to his hearers. Although these exhortations were usually balanced with admonitions to use wealth for the common good, and not to be motivated by greed, they are nevertheless clear endorsements of vigorous economic behavior. Puritan leaders may have placed boundaries around economic activism, but they still preached activism.

Frey (1998) has argued that orthodox Puritanism exhibited an inherent tension between approval of economic activity and emphasis upon the moral boundaries that define acceptable economic activity. A calling was never meant for the service of self alone but for the service of God and the common good. That is, Puritan thinkers always viewed economic activity against the backdrop of social and moral obligation. Perhaps what orthodox Puritanism contributed to capitalism was a sense of economic calling bounded by moral responsibility. In an age when Puritan theologians were widely read, Williams Ames defined the essence of the business contract as “upright dealing, by which one does sincerely intend to oblige himself…” If nothing else, business would be enhanced and made more efficient by an environment of honesty and trust.

Finally, whether Weber misinterpreted Puritanism is one issue. Whether he misinterpreted capitalism by exaggerating the importance of asceticism is another. Weber’s favorite exemplar of capitalism, Benjamin Franklin, did advocate unremitting personal thrift and discipline. No doubt, certain sectors of capitalism advanced by personal thrift, sometimes carried to the point of deprivation. Samuelsson (83-87) raises serious questions, however, that thrift could have contributed even in a minor way to the creation of the large fortunes of capitalists. Perhaps more important than personal fortunes is the finance of business. The retained earnings of successful enterprises, rather than personal savings, probably have provided a major source of funding for business ventures from the earliest days of capitalism. And successful capitalists, even in Puritan New England, have been willing to enjoy at least some of the fruits of their labors. Perhaps the spirit of capitalism was not the spirit of asceticism.

Evidence of Links between Values and Capitalism

Despite the critics, some have taken the Protestant ethic to be a contributing cause of capitalism, perhaps a necessary cause. Sociologist C. T. Jonassen (1947) understood the Protestant ethic this way. By examining a case of capitalism’s emergence in the nineteenth century, rather than in the Reformation or Puritan eras, he sought to resolve some of the uncertainties of studying earlier eras. Jonassen argued that capitalism emerged in nineteenth-century Norway only after an indigenous, Calvinist-like movement challenged the Lutheranism and Catholicism that had dominated the country. Capitalism had not “developed in Norway under centuries of Catholic and Lutheran influence,” although it appeared only “two generations after the introduction of a type of religion that produced the same behavior as Calvinism” (Jonassen, 684). Jonassen’s argument also discounted other often-cited causes of capitalism, such as the early discoveries of science, the Renaissance, or developments in post-Reformation Catholicism; these factors had existed for centuries by the nineteenth century and still had left Norway as a non-capitalist society. Only in the nineteenth century, after a Calvinist-like faith emerged, did capitalism develop.

Engerman’s (2000) review of economic historians shows that they have given little explicit attention to Weber in recent years. However, they show an interest in the impact of cultural values broadly understood on economic growth. A modified version of the Weber thesis has also found some support in empirical economic research. Granato, Inglehart and Leblang (1996, 610) incorporated cultural values in cross-country growth models on the grounds that Weber’s thesis fits the historical evidence in Europe and America. They did not focus on Protestant values, but accepted “Weber’s more general concept, that certain cultural factors influence economic growth…” Specifically they incorporated a measure of “achievement motivation” in their regressions and concluded that such motivation “is highly relevant to economic growth rates” (625). Conversely, they found that “post-materialist” (i.e., environmentalist) values are correlated with slower economic growth. Barro’s (1997, 27) modified Solow growth models also find that a “rule of law index” is associated with more rapid economic growth. This index is a proxy for such things as “effectiveness of law enforcement, sanctity of contracts and … the security of property rights.” Recalling Puritan theologian William Ames’ definition of a contract, one might conclude that a religion such as Puritanism could create precisely the cultural values that Barro finds associated with economic growth.

Conclusion

Max Weber’s thesis has attracted the attention of scholars and researchers for most of a century. Some (including Weber) deny that the Protestant ethic should be understood to be a cause of capitalism — that it merely points to a congruency between and culture’s religion and its economic system. Yet Weber, despite his own protests, wrote as though he believed that traditional capitalism would never have turned into modern capitalism except for the Protestant ethic– implying causality of sorts. Historical evidence from the Reformation era (sixteenth century) does not provide much support for a strong (causal) interpretation of the Protestant ethic. However, the emergence of a vigorous capitalism in Puritan England and its American colonies (and the case of Norway) at least keeps the case open. More recent quantitative evidence supports the hypothesis that cultural values count in economic development. The cultural values examined in recent studies are not religious values, as such. Rather, such presumably secular values as the need to achieve, intolerance for corruption, respect for property rights, are all correlated with economic growth. However, in its own time Puritanism produced a social and economic ethic known for precisely these sorts of values.

Fischoff, Ephraim. “The Protestant Ethic and the Spirit of Capitalism: The History of a Controversy.” Social Research (1944). Reprinted in R. W. Green (ed.), Protestantism and Capitalism: The Weber Thesis and Its Critics. Boston: D.C. Heath, 1958.

Frey, Donald E. “Individualist Economic Values and Self-Interest: The Problem in the Protestant Ethic.” Journal of Business Ethics (Oct. 1998).

Ola Honningdal Grytten, Norwegian School of Economics and Business Administration

Overview

Norway, with its population of 4.6 million on the northern flank of Europe, is today one of the most wealthy nations in the world, both measured as GDP per capita and in capital stock. On the United Nation Human Development Index, Norway has been among the three top countries for several years, and in some years the very top nation. Huge stocks of natural resources combined with a skilled labor force and the adoption of new technology made Norway a prosperous country during the nineteenth and twentieth century.

Table 1 shows rates of growth in the Norwegian economy from 1830 to the present using inflation-adjusted gross domestic product (GDP). This article splits the economic history of Norway into two major phases — before and after the nation gained its independence in 1814.

Before Independence

The Norwegian economy was traditionally based on local farming communities combined with other types of industry, basically fishing, hunting, wood and timber along with a domestic and international-trading merchant fleet. Due to topography and climatic conditions the communities in the North and the West were more dependent on fish and foreign trade than the communities in the south and east, which relied mainly on agriculture. Agricultural output, fish catches and wars were decisive for the waves in the economy previous to independence. This is reflected in Figure 1, which reports a consumer price index for Norway from 1516 to present.

The peaks in this figure mark the sixteenth-century Price Revolution (1530s to 1590s), the Thirty Years War (1618-1648), the Great Nordic War (1700-1721), the Napoleonic Wars (1800-1815), the only period of hyperinflation in Norway — World War I (1914-1918) — and the stagflation period, i.e. high rates of inflation combined with a slowdown in production, in the 1970s and early 1980s.

Figure 1
Consumer Price Index for Norway, 1516-2003 (1850 = 100).

Source: Grytten (2004a)

During the last decades of the eighteenth century the Norwegian economy bloomed along with a first era of liberalism. Foreign trade of fish and timber had already been important for the Norwegian economy for centuries, and now the merchant fleet was growing rapidly. Bergen, located at the west coast, was the major city, with a Hanseatic office and one of the Nordic countries’ largest ports for domestic and foreign trade.

When Norway gained its independence from Denmark in 1814, after a tight union covering 417 years, it was a typical egalitarian country with a high degree of self-supply from agriculture, fisheries and hunting. According to the population censuses from 1801 and 1815 more than ninety percent of the population of 0.9 million lived in rural areas, mostly on small farms.

After Independence (1814)

Figure 2 shows annual development in GDP by expenditure (in fixed 2000 prices) from 1830 to 2003. The series, with few exceptions, reveal steady growth rates with few huge fluctuations. However, economic growth as a more or less continuous process started in the 1840s. We can also conclude that the growth process slowed down during the last three decades of the nineteenth century. The years 1914-1945 were more volatile than any other period in question, while there was an impressive and steady rate of growth until the mid 1970s and from then on slower growth.

Stagnation and Institution Building, 1814-1843

The newborn state lacked its own institutions, industrial entrepreneurs and domestic capital. However, due to its huge stocks of natural resources and its geographical closeness to the sea and to the United Kingdom, the new state, linked to Sweden in a loose royal union, seized its opportunities after some decades. By 1870 it had become a relatively wealthy nation. Measured in GDP per capita Norway was well over the European average, in the middle of the West European countries, and in fact, well above Sweden.

During the first decades after its independence from Denmark, the new state struggled with the international recession after the Napoleonic wars, deflationary monetary policy, and protectionism from the UK.

The Central Bank of Norway was founded in 1816, and a national currency, the spesidaler pegged to silver was introduced. The daler depreciated heavily during the first troubled years of recession in the 1820s.

The Great Boom, 1843-1875

After the Norwegian spesidaler gained its par value to silver in 1842, Norway saw a period of significant economic growth up to the mid 1870s. This impressive growth was mirrored in only a few other countries. The growth process was very much initiated by high productivity growth in agriculture and the success of the foreign sector. The adoption of new structures and technology along with substitution from arable to lifestock production made labor productivity in agriculture increase by about 150 percent between 1835 and 1910. The exports of timber, fish and in particular maritime services achieved high growth rates. In fact, Norway became a major power in shipping services during this period, accounting for about seven percent of the world merchant fleet in 1875. Norwegian sailing vessels freighted international goods all over the world at low prices.

The success of the Norwegian foreign sector can be explained by a number of factors. Liberalization of world trade and high international demand secured a market for Norwegian goods and services. In addition, Norway had vast stocks of fish and timber along with maritime skills. According to recent calculations, GDP per capita had an annual growth rate of 1.6 percent 1843 to 1876, well above the European average. At the same time the Norwegian annual rate of growth for exports was 4.8 percent. The first modern large-scale manufacturing industry in Norway saw daylight in the 1840s, when textile plants and mechanized industry were established. A second wave of industrialization took place in the 1860s and 1870s. Following the rapid productivity growth in agriculture, food processing and dairy production industries showed high growth in this period.

During this great boom, capital was imported mainly from Britain, but also from Sweden, Denmark and Germany, the four most important Norwegian trading partners at the time. In 1536 the King of Denmark and Norway chose the Lutheran faith as the state religion. In consequence of the Reformation, reading became compulsory; consequently Norway acquired a generally skilled and independent labor force. The constitution from 1814 also cleared the way for liberalism and democracy. The puritan revivals during the nineteenth century created a business environment, which raised entrepreneurship, domestic capital and a productive labor force. In the western and southern parts of the country these puritan movements are still strong, both in daily life and within business.

Relative Stagnation with Industrialization, 1875-1914

Norway’s economy was hit hard during the “depression” from mid 1870s to the early 1890s. GDP stagnated, particular during the 1880s, and prices fell until 1896. This stagnation is mirrored in the large-scale emigration from Norway to North America in the 1880s. At its peak in 1882 as many as 28,804 persons, 1.5 percent of the population, left the country. All in all, 250,000 emigrated in the period 1879-1893, equal to 60 percent of the birth surplus. Only Ireland had higher emigration rates than Norway between 1836 and 1930, when 860,000 Norwegians left the country.

The long slow down can largely been explained by Norway’s dependence on the international economy and in particular the United Kingdom, which experienced slower economic growth than the other major economies of the time. As a result of the international slowdown, Norwegian exports contracted in several years, but expanded in others. A second reason for the slowdown in Norway was the introduction of the international gold standard. Norway adopted gold in January 1874, and due to the trade deficit, lack of gold and lack of capital, the country experienced a huge contraction in gold reserves and in the money stock. The deflationary effect strangled the economy. Going onto the gold standard caused the appreciation of the Norwegian currency, the krone, as gold became relatively more expensive compared to silver. A third explanation of Norway’s economic problems in the 1880s is the transformation from sailing to steam vessels. Norway had by 1875 the fourth biggest merchant fleet in the world. However, due to lack of capital and technological skills, the transformation from sail to steam was slow. Norwegian ship owners found a niche in cheap second-hand sailing vessels. However, their market was diminishing, and finally, when the Norwegian steam fleet passed the size of the sailing fleet in 1907, Norway was no longer a major maritime power.

A short boom occurred from the early 1890s to 1899. Then, a crash in the Norwegian building industry led to a major financial crash and stagnation in GDP per capita from 1900 to 1905. Thus from the middle of the 1870s until 1905 Norway performed relatively bad. Measured in GDP per capita, Norway, like Britain, experienced a significant stagnation relative to most western economies.

After 1905, when Norway gained full independence from Sweden, a heavy wave of industrialization took place. In the 1890s the fish preserving and cellulose and paper industries started to grow rapidly. From 1905, when Norsk Hydro was established, manufacturing industry connected to hydroelectrical power took off. It is argued, quite convincingly, that if there was an industrial breakthrough in Norway, it must have taken place during the years 1905-1920. However, the primary sector, with its labor-intensive agriculture and increasingly more capital-intensive fisheries, was still the biggest sector.

Crises and Growth, 1914-1945

Officially Norway was neutral during World War I. However, in terms of the economy, the government clearly took the side of the British and their allies. Through several treaties Norway gave privileges to the allied powers, which protected the Norwegian merchant fleet. During the war’s first years, Norwegian ship owners profited from the war, and the economy boomed. From 1917, when Germany declared war against non-friendly vessels, Norway took heavy losses. A recession replaced the boom.

Norway suspended gold redemption in August 1914, and due to inflationary monetary policy during the war and in the first couple of years afterward, demand was very high. When the war came to an end this excess demand was met by a positive shift in supply. Thus, Norway, like other Western countries experienced a significant boom in the economy from the spring of 1919 to the early autumn 1920. The boom was followed by high inflation, trade deficits, currency depreciation and an overheated economy.

The international postwar recession beginning in autumn 1920, hit Norway more severely than most other countries. In 1921 GDP per capita fell by eleven percent, which was only exceeded by the United Kingdom. There are two major reasons for the devastating effect of the post-war recession. In the first place, as a small open economy, Norway was more sensitive to international recessions than most other countries. This was in particular the case because the recession hit the country’s most important trading partners, the United Kingdom and Sweden, so hard. Secondly, the combination of strong and mostly pro-cyclical inflationary monetary policy from 1914 to 1920 and thereafter a hard deflationary policy made the crisis worse (Figure 3).

Figure 3
Money Aggregates for Norway, 1910-1930

Source: Klovland (2004a)

In fact, Norway pursued a long, but non-persistent deflationary monetary policy aimed at restoring the par value of the krone (NOK) up to May 1928. In consequence, another recession hit the economy during the middle of the 1920s. Hence, Norway was one of the worst performers in the western world in the 1920s. This can best be seen in the number of bankruptcies, a huge financial crisis and mass unemployment. Bank losses amounted to seven percent of GDP in 1923. Total unemployment rose from about one percent in 1919 to more than eight percent in 1926 and 1927. In manufacturing it reached more than 18 percent the same years.

Despite a rapid boom and success within the whaling industry and shipping services, the country never saw a convincing recovery before the Great Depression hit Europe in late summer 1930. The worst year for Norway was 1931, when GDP per capita fell by 8.4 percent. This, however, was not only due to the international crisis, but also to a massive and violent labor conflict that year. According to the implicit GDP deflator prices fell more than 63 percent from 1920 to 1933.

All in all, however, the depression of the 1930s was milder and shorter in Norway than in most western countries. This was partly due to the deflationary monetary policy in the 1920s, which forced Norwegian companies to become more efficient in order to survive. However, it was probably more important that Norway left gold as early as September 27th, 1931 only a week after the United Kingdom. Those countries that left gold early, and thereby employed a more inflationary monetary policy, were the best performers in the 1930s. Among them were Norway and its most important trading partners, the United Kingdom and Sweden.

During the recovery period, Norway in particular saw growth in manufacturing output, exports and import substitution. This can to a large extent be explained by currency depreciation. Also, when the international merchant fleet contracted during the drop in international trade, the Norwegian fleet grew rapidly, as Norwegian ship owners were pioneers in the transformation from steam to diesel engines, tramp to line freights and into a new expanding niche: oil tankers.

The primary sector was still the largest in the economy during the interwar years. Both fisheries and agriculture struggled with overproduction problems, however. These were dealt with by introducing market controls and cartels, partly controlled by the industries themselves and partly by the government.

The business cycle reached its bottom in late 1932. Despite relatively rapid recovery and significant growth both in GDP and in employment, unemployment stayed high, and reached 10-11 percent on annual basis from 1931 to 1933 (Figure 4).

Figure 4
Unemployment Rate and Public Relief Work
as a Percent of the Work Force, 1919-1939

Source: Hodne and Grytten (2002)

The standard of living became poorer in the primary sector, among those employed in domestic services and for the underemployed and unemployed and their households. However, due to the strong deflation, which made consumer prices fall by than 50 percent from autumn 1920 to summer 1933, employees in manufacturing, construction and crafts experienced an increase in real wages. Unemployment stayed persistently high due to huge growth in labor supply, as result of immigration restrictions by North American countries from the 1920s onwards.

Denmark and Norway were both victims of a German surprise attack the 9th of April 1940. After two months of fighting, the allied troops surrendered in Norway on June 7th and the Norwegian royal family and government escaped to Britain.

From then until the end of the war there were two Norwegian economies, the domestic German-controlled and the foreign Norwegian- and Allied-controlled economy. The foreign economy was primarily established on the basis of the huge Norwegian merchant fleet, which again was among the biggest in the world accounting for more than seven percent of world total tonnage. Ninety percent of this floating capital escaped the Germans. The ships were united into one state-controlled company, NORTASHIP, which earned money to finance the foreign economy. The domestic economy, however, struggled with a significant fall in production, inflationary pressure and rationing of important goods, which three million Norwegians had to share with 400.000 Germans occupying the country.

Economic Planning and Growth, 1945-1973

After the war the challenge was to reconstruct the economy and re-establish political and economic order. The Labor Party, in office from 1935, grabbed the opportunity to establish a strict social democratic rule, with a growing public sector and widespread centralized economic planning. Norway first declined the U.S. proposition of financial aid after the world. However, due to lack of hard currencies they accepted the Marshall aid program. By receiving 400 million dollars from 1948 to 1952, Norway was one of the biggest per capita recipients.

As part of the reconstruction efforts Norway joined the Bretton Woods system, GATT, the IMF and the World Bank. Norway also chose to become member of NATO and the United Nations. In 1958 the country also joined the European Free Trade Area (EFTA). The same year Norway made the krone convertible to the U.S. dollar, as many other western countries did with their currencies.

The years from 1950 to 1973 are often called the golden era of the Norwegian economy. GDP per capita showed an annual growth rate of 3.3 percent. Foreign trade stepped up even more, unemployment barely existed and the inflation rate was stable. This has often been explained by the large public sector and good economic planning. The Nordic model, with its huge public sector, has been said to be a success in this period. If one takes a closer look into the situation, one will, nevertheless, find that the Norwegian growth rate in the period was lower than that for most western nations. The same is true for Sweden and Denmark. The Nordic model delivered social security and evenly-distributed wealth, but it did not necessarily give very high economic growth.

Figure 5
Public Sector as a Percent of GDP, 1900-1990

Source: Hodne and Grytten (2002)

Petroleum Economy and Neoliberalism, 1973 to the Present

After the Bretton Woods system fell apart (between August 1971 and March 1973) and the oil price shock in autumn 1973, most developed economies went into a period of prolonged recession and slow growth. In 1969 Philips Petroleum discovered petroleum resources at the Ekofisk field, which was defined as part of the Norwegian continental shelf. This enabled Norway to run a countercyclical financial policy during the stagflation period in the 1970s. Thus, economic growth was higher and unemployment lower than for most other western countries. However, since the countercyclical policy focused on branch and company subsidies, Norwegian firms soon learned to adapt to policy makers rather than to the markets. Hence, both productivity and business structure did not have the incentives to keep pace with changes in international markets.

Norway lost significant competitive power, and large-scale deindustrialization took place, despite efforts to save manufacturing industry. Another reason for deindustrialization was the huge growth in the profitable petroleum sector. Persistently high oil prices from the autumn 1973 to the end of 1985 pushed labor costs upward, through spillover effects from high wages in the petroleum sector. High labor costs made the Norwegian foreign sector less competitive. Thus, Norway saw deindustrialization at a more rapid pace than most of her largest trading partners. Due to the petroleum sector, however, Norway experienced high growth rates in all the three last decades of the twentieth century, bringing Norway to the top of the world GDP per capita list at the dawn of the new millennium. Nevertheless, Norway had economic problems both in the eighties and in the nineties.

In 1981 a conservative government replaced Labor, which had been in power for most of the post-war period. Norway had already joined the international wave of credit liberalization, and the new government gave fuel to this policy. However, along with the credit liberalization, the parliament still ran a policy that prevented market forces from setting interest rates. Instead they were set by politicians, in contradiction to the credit liberalization policy. The level of interest rates was an important part of the political game for power, and thus, they were set significantly below the market level. In consequence, a substantial credit boom was created in the early 1980s, and continued to the late spring of 1986. As a result, Norway had monetary expansion and an artificial boom, which created an overheated economy. When oil prices fell dramatically from December 1985 onwards, the trade surplus was suddenly turned to a huge deficit (Figure 6).

Figure 6
North Sea Oil Prices and Norway’s Trade Balance, 1975-2000

Source: Statistics Norway

The conservative-center government was forced to keep a tighter fiscal policy. The new Labor government pursued this from May 1986. Interest rates were persistently high as the government now tried to run a trustworthy fixed-currency policy. In the summer of 1990 the Norwegian krone was officially pegged to the ECU. When the international wave of currency speculation reached Norway during autumn 1992 the central bank finally had to suspend the fixed exchange rate and later devaluate.

In consequence of these years of monetary expansion and thereafter contraction, most western countries experienced financial crises. It was relatively hard in Norway. Prices of dwellings slid, consumers couldn’t pay their bills, and bankruptcies and unemployment reached new heights. The state took over most of the larger commercial banks to avoid a total financial collapse.

After the suspension of the ECU and the following devaluation, Norway had growth until 1998, due to optimism, an international boom and high prices of petroleum. The Asian financial crisis also rattled the Norwegian stock market. At the same time petroleum prices fell rapidly, due to internal problems among the OPEC countries. Hence, the krone depreciated. The fixed exchange rate policy had to be abandoned and the government adopted inflation targeting. Along with changes in monetary policy, the center coalition government was also able to monitor a tighter fiscal policy. At the same time interest rates were high. As result, Norway escaped the overheating process of 1993-1997 without any devastating effects. Today the country has a strong and sound economy.

The petroleum sector is still very important in Norway. In this respect the historical tradition of raw material dependency has had its renaissance. Unlike many other countries rich in raw materials, natural resources have helped make Norway one of the most prosperous economies in the world. Important factors for Norway’s ability to turn resource abundance into economic prosperity are an educated work force, the adoption of advanced technology used in other leading countries, stable and reliable institutions, and democratic rule.

Nadav Halevi, Hebrew University

The Pre-state Background

The history of modern Israel begins in the 1880s, when the first Zionist immigrants came to Palestine, then under Ottoman rule, to join the small existing Jewish community, establishing agricultural settlements and some industry, restoring Hebrew as the spoken national language, and creating new economic and social institutions. The ravages of World War I reduced the Jewish population by a third, to 56,000, about what it had been at the beginning of the century.

As a result of the war, Palestine came under the control of Great Britain, whose Balfour Declaration had called for a Jewish National Home in Palestine. Britain’s control was formalized in 1920, when it was given the Mandate for Palestine by the League of Nations. During the Mandatory period, which lasted until May 1948, the social, political and economic structure for the future state of Israel was developed. Though the government of Palestine had a single economic policy, the Jewish and Arab economies developed separately, with relatively little connection.

Two factors were instrumental in fostering rapid economic growth of the Jewish sector: immigration and capital inflows. The Jewish population increased mainly through immigration; by the end of 1947 it had reached 630,000, about 35 percent of the total population. Immigrants came in waves, particularly large in the mid 1920s and mid 1930s. They consisted of ideological Zionists and refugees, economic and political, from Central and Eastern Europe. Capital inflows included public funds, collected by Zionist institutions, but were for the most part private funds. National product grew rapidly during periods of large immigration, but both waves of mass immigration were followed by recessions, periods of adjustment and consolidation.

In the period from 1922 to 1947 real net domestic product (NDP) of the Jewish sector grew at an average rate of 13.2 percent, and in 1947 accounted for 54 percent of the NDP of the Jewish and Arab economies together. NDP per capita in the Jewish sector grew at a rate of 4.8 percent; by the end of the period it was 8.5 times larger in than in 1922, and 2.5 times larger than in the Arab sector (Metzer, 1998). Though agricultural development – an ideological objective – was substantial, this sector never accounted for more than 15 percent of total net domestic product of the Jewish economy. Manufacturing grew slowly for most of the period, but very rapidly during World War II, when Palestine was cut off from foreign competition and was a major provider to the British armed forces in the Middle East. By the end of the period, manufacturing accounted for a quarter of NDP. Housing construction, though a smaller component of NDP, was the most volatile sector, and contributed to sharp business cycle movements. A salient feature of the Jewish economy during the Mandatory period, which carried over into later periods, was the dominant size of the services sector – more than half of total NDP. This included a relatively modern educational and health sector, efficient financial and business sectors, and semi-governmental Jewish institutions, which later were ready to take on governmental duties.

The Formative Years: 1948-1965

The state of Israel came into being, in mid May 1948, in the midst of a war with its Arab neighbors. The immediate economic problems were formidable: to finance and wage a war, to take in as many immigrants as possible (first the refugees kept in camps in Europe and on Cyprus), to provide basic commodities to the old and new population, and to create a government bureaucracy to cope with all these challenges. The creation of a government went relatively smoothly, as semi-governmental Jewish institutions which had developed during the Mandatory period now became government departments.

Cease-fire agreements were signed during 1949. By the end of that year a total of 340,000 immigrants had arrived, and by the end of 1951 an additional 345,000 (the latter including immigrants from Arab countries), thus doubling the Jewish population. Immediate needs were met by a strict austerity program and inflationary government finance, repressed by price controls and rationing of basic commodities. However, the problems of providing housing and employment for the new population were solved only gradually. A New Economic Policy was introduced in early 1952. It consisted of exchange rate devaluation, the gradual relaxation of price controls and rationing, and curbing of monetary expansion, primarily by budgetary restraint. Active immigration encouragement was curtailed, to await the absorption of the earlier mass immigration.

From 1950 until 1965, Israel achieved a high rate of growth: Real GNP (gross national product) grew by an average annual rate of over 11 percent, and per capita GNP by greater than 6 percent. What made this possible? Israel was fortunate in receiving large sums of capital inflows: U.S. aid in the forms of unilateral transfers and loans, German reparations and restitutions to individuals, sale of State of Israel Bonds abroad, and unilateral transfers to public institutions, mainly the Jewish Agency, which retained responsibility for immigration absorption and agricultural settlement. Thus, Israel had resources available for domestic use – for public and private consumption and investment – about 25 percent more than its own GNP. This made possible a massive investment program, mainly financed through a special government budget. Both the enormity of needs and the socialist philosophy of the main political party in the government coalitions led to extreme government intervention in the economy.

Governmental budgets and strong protectionist measures to foster import-substitution enabled the development of new industries, chief among them textiles, and subsidies were given to help the development of exports, additional to the traditional exports of citrus products and cut diamonds.

During the four decades from the mid 1960s until the present, Israel’s economy developed and changed, as did economic policy. A major factor affecting these developments has been the Arab-Israeli conflict. Its influence is discussed first, and is followed by brief descriptions of economic growth and fluctuations, and evolution of economic policy.

The Arab-Israel Conflict

The most dramatic event of the 1960s was the Six Day War of 1967, at the end of which Israel controlled the West Bank (of the Jordan River) – the area of Palestine absorbed by the Jordan since 1949 – and the Gaza Strip, controlled until then by Egypt.

As a consequence of the occupation of these territories Israel was responsible for the economic as well as the political life in the areas taken over. The Arab sections of Jerusalem were united with the Jewish section. Jewish settlements were established in parts of the occupied territories. As hostilities intensified, special investments in infrastructure were made to protect Jewish settlers. The allocation of resources to Jewish settlements in the occupied territories has been a political and economic issue ever since.

The economies of Israel and the occupied territories were partially integrated. Trade in goods and services developed, with restrictions placed on exports to Israel of products deemed too competitive, and Palestinian workers were employed in Israel particularly in construction and agriculture. At its peak, in 1996, Palestinian employment in Israel reached 115,000 to 120,000, about 40 percent of the Palestinian labor force, but never more than 6.5 percent of total Israeli employment. Thus, while employment in Israel was a major contributor to the economy of the Palestinians, its effects on the Israeli economy, except for the sectors of construction and agriculture, were not large.

The Palestinian economy developed rapidly – real per capita national income grew at an annual rate of close to 20 percent in 1969-1972 and 5 percent in 1973-1980 – but fluctuated widely thereafter, and actually decreased in times of hostilities. Palestinian per capita income equaled 10.2 percent of Israeli per capita income in 1968, 22.8 percent in 1986, and declined to 9.7 percent in 1998 (Kleiman, 2003).

As part of the peace process between Israel and the Palestinians initiated in the 1990s, an economic agreement was signed between the parties in 1994, which in effect transformed what had been essentially a one-sided customs agreement (which gave Israel full freedom to export to the Territories but put restrictions on Palestinian exports to Israel) into a more equal customs union: the uniform external trade policy was actually Israel’s, but the Palestinians were given limited sovereignty regarding imports of certain commodities.

Arab uprisings (intifadas), in the 1980s, and especially the more violent one beginning in 2000 and continuing into 2005, led to severe Israeli restrictions on interaction between the two economies, particularly employment of Palestinians in Israel, and even to military reoccupation of some areas given over earlier to Palestinian control. These measures set the Palestinian economy back many years, wiping out much of the gains in income which had been achieved since 1967 – per capita GNP in 2004 was $932, compared to about $1500 in 1999. Palestinian workers in Israel were replaced by foreign workers.

An important economic implication of the Arab-Israel conflict is that Israel must allocate a major part of its budget to defense. The size of the defense budget has varied, rising during wars and armed hostilities. The total defense burden (including expenses not in the budget) reached its maximum relative size during and after the Yom Kippur War of 1973, close to 30 percent of GNP in 1974-1978. In the 2000-2004 period, the defense budget alone reached about 22 to 25 percent of GDP. Israel has been fortunate in receiving generous amounts of U.S. aid. Until 1972 most of this came in the form of grants and loans, primarily for purchases of U.S. agricultural surpluses. But since 1973 U.S. aid has been closely connected to Israel’s defense needs. During 1973-1982 annual loans and grants averaged $1.9 billion, and covered some 60 percent of total defense imports. But even in more tranquil periods, the defense burden, exclusive of U.S. aid, has been much larger than usual in industrial countries during peace time.

Growth and Economic Fluctuations

The high rates of growth of income and income per capita which characterized Israel until 1973 were not achieved thereafter. GDP growth fluctuated, generally between 2 and 5 percent, reaching as high as 7.5 percent in 2000, but falling below zero in the recession years from 2001 to mid 2003. By the end of the twentieth century income per capita reached about $20,000, similar to many of the more developed industrialized countries.

Economic fluctuations in Israel have usually been associated with waves of immigration: a large flow of immigrants which abruptly increases the population requires an adjustment period until it is absorbed productively, with the investments for its absorption in employment and housing stimulating economic activity. Immigration never again reached the relative size of the first years after statehood, but again gained importance with the loosening of restrictions on emigration from the Soviet Union. The total number of immigrants in 1972-1982 was 325,000, and after the collapse of the Soviet Union immigration totaled 1,050,000 in 1990-1999, mostly from the former Soviet Union. Unlike the earlier period, these immigrants were gradually absorbed in productive employment (though often not in the same activity as abroad) without resort to make-work projects. By the end of the century the population of Israel passed 6,300,000, with the Jewish population being 78 percent of the total. The immigrants from the former Soviet Union were equal to about one-fifth of the Jewish population, and were a significant and important addition of human capital to the labor force.

As the economy developed, the structure of output changed. Though the service sectors are still relatively large – trade and services contributing 46 percent of the business sector’s product – agriculture has declined in importance, and industry makes up over a quarter of the total. The structure of manufacturing has also changed: both in total production and in exports the share of traditional, low-tech industries has declined, with sophisticated, high-tech products, particularly electronics, achieving primary importance.

Fluctuations in output were marked by periods of inflation and periods of unemployment. After a change in exchange rate policy in the late 1970s (discussed below), an inflationary spiral was unleashed. Hyperinflation rates were reached in the early 1980s, about 400 percent per year by the time a drastic stabilization policy was imposed in 1985. Exchange rate stabilization, budgetary and monetary restraint, and wage and price freezes sharply reduced the rate of inflation to less than 20 percent, and then to about 16 percent in the late 1980s. Very drastic monetary policy, from the late 1990s, finally reduced the inflation to zero by 2005. However, this policy, combined with external factors such as the bursting of the high-tech bubble, recession abroad, and domestic insecurity resulting from the intifada, led to unemployment levels above 10 percent at the beginning of the new century. The economic improvements since the latter half of 2003 have, as yet (February 2005), not significantly reduced the level of unemployment.

Policy Changes

The Israeli economy was initially subject to extensive government controls. Only gradually was the economy converted into a fairly free (though still not completely so) market economy. This process began in the 1960s. In response to a realization by policy makers that government intervention in the economy was excessive, and to the challenge posed by the creation in Europe of a customs union (which gradually progressed into the present European Union), Israel embarked upon a very gradual process of economic liberalization. This appeared first in foreign trade: quantitative restrictions on imports were replaced by tariff protection, which was slowly reduced, and both import-substitution and exports were encouraged by more realistic exchange rates rather than by protection and subsidies. Several partial trade agreements with the European Economic Community (EEC), starting in 1964, culminated in a free trade area agreement (FTA) in industrial goods in 1975, and an FTA agreement with the U.S. came into force in 1985.

By late 1977 a considerable degree of trade liberalization had taken place. In October of that year, Israel moved from a fixed exchange rate system to a floating rate system, and restrictions on capital movements were considerably liberalized. However, there followed a disastrous inflationary spiral which curbed the capital liberalization process. Capital flows were not completely liberalized until the beginning of the new century.

Throughout the 1980s and the 1990s there were additional liberalization measures: in monetary policy, in domestic capital markets, and in various instruments of governmental interference in economic activity. The role of government in the economy was considerably decreased. On the other hand, some governmental economic functions were increased: a national health insurance system was introduced, though private health providers continued to provide health services within the national system. Social welfare payments, such as unemployment benefits, child allowances, old age pensions and minimum income support, were expanded continuously, until they formed a major budgetary expenditure. These transfer payments compensated, to a large extent, for the continuous growth of income inequality, which had moved Israel from among the developed countries with the least income inequality to those with the most. By 2003, 15 percent of the government’s budget went to health services, 15 percent to education, and an additional 20 percent were transfer payments through the National Insurance Agency.

Beginning in 2003, the Ministry of Finance embarked upon a major effort to decrease welfare payments, induce greater participation in the labor force, privatize enterprises still owned by government, and reduce both the relative size of the government deficit and the government sector itself. These activities are the result of an ideological acceptance by the present policy makers of the concept that a truly free market economy is needed to fit into and compete in the modern world of globalization.

An important economic institution is the Histadrut, a federation of labor unions. What had made this institution unique is that, in addition to normal labor union functions, it encompassed agricultural and other cooperatives, major construction and industrial enterprises, and social welfare institutions, including the main health care provider. During the Mandatory period, and for many years thereafter, the Histadrut was an important factor in economic development and in influencing economic policy. During the 1990s, the Histadrut was divested of many of its non-union activities, and its influence in the economy has greatly declined. The major unions associated with it still have much say in wage and employment issues.

The Challenges Ahead

As it moves into the new century, the Israeli economy has proven to be prosperous, as it continuously introduces and applies economic innovation, and to be capable of dealing with economic fluctuations. However, it faces some serious challenges. Some of these are the same as those faced by most industrial economies: how to reconcile innovation, the switch from traditional activities which are no longer competitive, to more sophisticated, skill-intensive products, with the dislocation of labor it involves, and the income inequality it intensifies. Like other small economies, Israel has to see how it fits into the new global economy, marked by the two major markets of the EU and the U.S., and the emergence of China as a major economic factor.

Special issues relate to the relations of Israel with its Arab neighbors. First are the financial implications of continuous hostilities and military threats. Clearly, if peace can come to the region, resources can be transferred to more productive uses. Furthermore, foreign investment, so important for Israel’s future growth, is very responsive to political security. Other issues depend on the type of relations established: will there be the free movement of goods and workers between Israel and a Palestinian state? Will relatively free economic relations with other Arab countries lead to a greater integration of Israel in the immediate region, or, as is more likely, will Israel’s trade orientation continue to be directed mainly to the present major industrial countries? If the latter proves true, Israel will have to carefully maneuver between the two giants: the U.S. and the EU.

John E. Murray, University of Toledo

Overview and Definition

Industrial sickness funds provided an early form of health insurance. They were financial institutions that extended cash payments and in some cases medical benefits to members who became unable to work due to sickness or injury. The term industrial sickness funds is a later construct which describes funds organized by companies, which were also known as establishment funds, and by labor unions. These funds were widespread geographically in the United States; the 1890 Census of Insurance found 1,259 nationwide, with concentrations in the Northeast, Midwest, California, Texas, and Louisiana (U.S. Department of the Interior, 1895). By the turn of the twentieth century, some industrial sickness funds had accumulated considerable experience at managing sickness benefits. A few predated the Civil War. When the U. S. Commissioner of Labor surveyed a sample of sickness funds in 1908, it found 867 non-fraternal funds nationwide that provided temporary disability benefits (U.S. Commissioner of Labor, 1909). By the time of World War I, these funds, together with similar funds sponsored by fraternal societies, covered 30 to 40 percent of non-agricultural wage workers in the more industrialized states, or by extension, eight to nine million nationwide (Murray 2007a). Sickness funds were numerous, widespread, and in general carefully operated.

Industrial sickness funds were among the earliest providers of any type of health or medical benefits in the United States. In fact, their earliest product was called “workingman’s insurance” or “sickness insurance,” terms that described their clientele and purpose accurately. In the late Progressive Era, reformers promoted government insurance programs that would supplant the sickness funds. To sound more British, they used the term “health insurance,” and that is the phrase we still use for this kind of insurance contract (Numbers 1978). In the history of health insurance, the funds were contemporary with benefit operations of fraternal societies (see fraternal sickness insurance) and led into the period of group health insurance (see health insurance, U. S.). They should be distinguished from the sickness benefits provided by some industrial insurance policies, which required weekly premium payments and paid a cash benefit upon death, which was intended to cover burial expenses.

Many written histories of health insurance have missed the important role industrial sickness funds played in both relief of worker suffering and in the political process. Recent historians have tended to criticize, patronize, or ignore sickness funds. Lubove (1986) complained that they stood in the way of government insurance for all workers. Klein (2003) claimed that they were inefficient, without making explicit her standard for that judgment. Quadagno (2005) simply asserted that no one had thought of health insurance before the 1920s. Contemporary commentators such as I. M. Rubinow and Irving Fisher criticized workers who preferred “hopelessly inadequate” sickness fund insurance over government insurance as “infantile” (Derickson 2005). But these criticisms stemmed more from their authors’ ideological preconceptions than from close study of these institutions.

Rise and Operations of Industrial Sickness Funds

The period of their greatest extent and importance was from the 1880s to around 1940. The many state labor bureau surveys of individual workers, since digitized by the University of California’s Historical Labor Statistics Project and available for download at EH.net, often asked questions such as “do you belong to a benefit society,” meaning a fraternal sickness benefit fund or an industrial sickness fund. Of the surveys from the early 1890s that included this question, around a quarter of respondents indicated that they belonged to such societies. Later, closer to 1920, several states examined the extent of sickness insurance coverage in response to movements to create governmental health insurance for workers (Table 1). These later studies indicated that in the Northeast, Midwest, and California, between thirty and forty percent of non-agricultural workers were covered. Thus, remarkably, these societies had actually increased their market share over a three decade period in which the labor force itself grew from 13 to 30 million workers (Murray 2007a). Industrial sickness funds were dynamic institutions, capable of dealing with an ever expanding labor market

Industrial sickness funds operated in a relatively simple fashion, but one that enabled them to mitigate the usual information problems that emerge in insurance markets. The process of joining a fund and making a claim typically worked as follows. A newly hired worker in a plant with such a fund explicitly applied to join, often after a probationary period during which fund managers could observe his baseline health and work habits. After admission to the fund, he paid an entrance fee followed by weekly dues. Since the average industrial worker in the 1910s earned about ten dollars a week, the entrance fee of one dollar was a half-day’s pay and the dues of ten cents made the cost to the worker around one percent of his pay packet.

A member who was unable to work contacted his fund, which then sent either a committee of fellow fund members, a physician, or both to check on the member-now-claimant. If they found him as sick as he had said he was, and in their judgment he was unable to work, after a one week waiting period he received around half his weekly pay. The waiting period was intended to let transient, less serious illnesses resolve so that the fund could support members with longer-term medical problems. To continue receiving the sick pay the claimant needed to allow periodic examinations by a physician or visiting committee. In rough terms, the average worker missed two percent of a work year, or about a week every year, a rate that varied by age and industry. The quarter of all workers who missed any work lost on average one month’s pay; thus a typical incapacitated worker received three and a half weeks of benefit per year. Comparing the cost of dues and expected value of benefits shows that the sickness funds were close to an actuarially fair bet: $5.00 in annual dues compared to (0.25 chance of falling ill) x (3.5 weeks of benefits) x ($5.00 weekly benefit), or about four and a half dollars in expected benefits. Thus, sickness funds appear to have been a reasonably fair deal for workers.

Establishment funds did not invent sickness benefits by any means. Rather, they systematized previous arrangements for supporting sick workers or the survivors of deceased workers. The old way was to pass the hat, which was characterized by random assessments and arbitrary financial awards. Workers and employers both observed that contributors and beneficiaries alike detested passing the hat. Fellow workers complained about the surprise nature of the hat’s appearance, and beneficiaries faced humiliation upon grief when the hat contained less money than had been collected for a more popular co-worker. Eventually rules replaced discretion, and benefits were paid according to a published schedule, either as a flat rate per diem or as a percentage of wages. The 1890 Census of Insurance reported that only a few funds extended benefits “at the discretion of the society,” and by the time of the 1908 Commissioner of Labor survey the practice had disappeared (Murray 2007).

Labor union funds began in the early nineteenth century. In the earliest union funds, members of craft unions pledged to complete jobs that ill brothers had contracted to perform but could not finish due to illness. Eventually cash benefit payments replaced the in-kind promises of labor, accompanied by cash premium payments into the union’s kitty. While criticized by many observers as unstable, labor union funds actually operated in transparent fashion. Even funds that offered unemployment benefits survived the depression of the mid-1890s by reducing benefit payments and enacting other conservative measures. Another criticism was that their benefits were too small in amount and too brief in duration, but according to the 1908 Commissioner of Labor survey, labor union funds and establishment funds offered similar levels of benefits. The cost-benefit ratio did favor establishment funds, but establishment fund membership ended with employment at a particular company, while union funds offered the substantial attraction of benefits that were portable from job to job.

The cash payment to sick workers created an incentive to take sick leave that workers without sickness insurance did not face; this is the moral hazard of sick pay. Further, workers who believed that they were more likely to make a sick claim would have a stronger incentive to join a sickness fund than a worker in relatively good health; this is called adverse selection. Early twentieth century commentators on government sickness insurance disagreed on the extent and even the existence of moral hazard and adverse selection in sickness insurance. Later statistical studies found evidence for both in establishment funds. However, the funds themselves had understood the potential financial damage each could wreak and strategized to mitigate such losses. The magnitude of the sick pay moral hazard was small, and affected primarily the tendency of the worker to make a claim in the first place. Many sickness funds limited their liability here by paying for the physician who examined the claimant and thus was responsible for approving extended sickness payments. Physicians appear to have paid attention to the wishes of those who paid them. Among claimants in funds that paid the examining physician directly, the average duration of their illness ended significantly earlier. By the same token, physicians who were paid by the worker tended to approve longer absences for that worker—a sign that physicians too responded to incentives.

Testing for adverse selection depends on whether membership in a company’s fund was the worker’s choice (that is, it was voluntary) or the company’s choice (that is, it was compulsory). In fact among establishment funds in which membership was voluntary, claim rates per member were significantly higher than in mandatory membership funds. This indicates that voluntary funds were especially attractive to sicker workers, which is the essence of adverse selection. To reduce the risks of adverse selection, funds imposed age limits to keep out older applicants, physical examinations to discourage the obviously ill, probationary periods to reveal chronic illness, and pre-existing condition clauses to avoid paying for such conditions (Murray 2007a). Sickness funds thus cleverly managed information problems typical of insurance markets.

Industrial Sickness Funds and Progressive Era Politics

Industrial sickness funds were the linchpin of efforts to promote and to oppose the Progressive campaign for state-level mandatory government sickness insurance. One consistent claim made by government insurance supporters was that workers could neither afford to pay for sickness insurance nor to save in advance of financially damaging health problems. The leading advocacy organization, the American Association for Labor Legislation (AALL), reported in its magazine that “Savings of Wage-Earners Are Insufficient to Meet this Loss,” meaning lost income during sickness (American Association for Labor Legislation 1916a). However, worker surveys of savings, income, and insurance holdings revealed that workers rationally strategized according to their varying needs and abilities across the life-cycle. Young workers saved little and were less likely to belong to industrial sickness funds—but were less likely to miss work due to illness as well. Middle aged workers, married with families to support, were relatively more likely to belong to a sickness fund. Older workers pursued a different strategy, saving more and relying on sickness funds less; among other factors, they wanted greater liquidity in their financial assets (Murray 2007a). Worker strategies reflected varying needs at varying stages of life, some (but not all) of which could be adequately addressed by membership in sickness funds.

Despite claims to the contrary by some historians, there was little popular support for government sickness insurance in early twentieth century America. Lobbying by the AALL led twelve states to charge investigatory commissions with determining the need for and feasibility of government sickness insurance (Moss 1996). The AALL offered a basic bill that could be adjusted to meet a state’s particular needs (American Association for Labor Legislation 1916b). Typically the Association prodded states to adopt a version of German insurance, which would keep the many small industrial sickness funds while forcing new members into some and creating new funds for other workers. However, these bills met consistent defeat in statehouses, earning only a fleeting victory in the New York Senate in 1919, which was followed by the bill’s death in an Assembly committee (Hoffman 2001). In the previous year a California referendum on a constitutional amendment that would allow the government to provide sickness insurance lost by nearly three to one (Costa 1996).

After the Progressive campaign exhausted itself, industrial sickness funds continued to grow through the 1920s, but the Great Depression exposed deep flaws in their structure. Many labor union funds, without a sponsoring firm to act as lender of last resort, dissolved. Establishment funds failed at a surprisingly low rate, but their survival was made possible by the tendency of firms to fire less healthy workers. Federal surveys in Minnesota found that ill-health led to earlier job loss in the Depression, and comparisons of self reported health in later surveys indicated that the unemployed were in fact in poorer health than the employed, and the disparity grew as the Depression deepened. Thus, industrial sickness funds paradoxically enjoyed falling claim rates (and thus reduced expenses) as the economy deteriorated (Murray 2007).

Decline and Rebirth of Sickness Funds

At the same time, commercial insurers had been engaging in ever more productive research into the actuarial science of group health insurance. Eventually the insurers cut premium rates while offering benefits comparable to those available through sickness funds. As a result, the commercial insurers and Blue CrossBlue Shield came to dominate the market for health benefits. A federal survey that covered the early 1930s found more firms with group health than with mutual benefit societies but the benefit societies still insured more than twice as many workers (Sayers, et al 1937). By the later 1930s that gap in the number of firms had widened in favor of group health (Figure 1), and the number of workers insured was about equal. After the mid-1940s, industrial sickness funds were no longer a significant player in markets for health insurance (Murray 2007a).

More recently, a type of industrial sickness fund has begun to stage a comeback. Voluntary employee beneficiary associations (VEBAs) fall under a 1928 federal law that was created to govern industrial sickness funds. VEBAs are trusts set up to pay employee benefits without earning profits for the company. In late 2007, the Big Three automakers each contracted with the United Auto Workers (UAW) to operate a VEBA that would provide health insurance for UAW members. If the automakers and their workers succeed in establishing VEBAs that stand the test of time, they will have resurrected a once-successful financial institution previously thought relegated to the pre-World War II economy (Murray 2007b).